Joseph E. Stiglitz's Blog, page 11

The benefits of internet innovation are hard to spot in GDP statistics | Joseph Stiglitz

As economist Robert Solow lamented: 'You can see the computer age everywhere but in the productivity statistics'

Around the world, there is enormous enthusiasm for the type of technological innovation symbolised by Silicon Valley. In this view, America's ingenuity represents its true comparative advantage, which others strive to imitate. But there is a puzzle: it is difficult to detect the benefits of this innovation in GDP statistics.

What is happening today is analogous to developments a few decades ago, early in the era of personal computers. In 1987, economist Robert Solow – awarded the Nobel Prize for his pioneering work on growth – lamented: "You can see the computer age everywhere but in the productivity statistics." There are several possible explanations for this.

Perhaps GDP does not really capture the improvements in living standards that computer-age innovation is engendering. Or perhaps this innovation is less significant than its enthusiasts believe. As it turns out, there is some truth in both perspectives.

Recall how a few years ago, just before the collapse of Lehman Brothers, the financial sector prided itself on its innovativeness. Given that financial institutions had been attracting the best and brightest from around the world, one would have expected nothing less. But, upon closer inspection, it became clear that most of this innovation involved devising better ways of scamming others, manipulating markets without getting caught (at least for a long time), and exploiting market power.

In this period, when resources flowed to this "innovative" sector, GDP growth was markedly lower than it was before. Even in the best of times, it did not lead to an increase in living standards (except for the bankers), and it eventually led to the crisis from which we are only now recovering. The net social contribution of all of this "innovation" was negative.

Similarly, the dotcom bubble that preceded this period was marked by innovation – websites through which one could order dog food and soft drinks. At least this era left a legacy of efficient search engines and a fibre-optic infrastructure. But it is not an easy matter to assess how the time savings implied by online shopping, or the cost savings that might result from increased competition (owing to greater ease of price comparison online), affects our standard of living.

Two things should be clear. First, the profitability of an innovation may not be a good measure of its net contribution to our standard of living. In our winner-takes-all economy, an innovator who develops a better website for online dog-food purchases and deliveries may attract everyone around the world who uses the internet to order dog food, making enormous profits in the process. But without the delivery service, much of those profits simply would have gone to others. The website's net contribution to economic growth may in fact be relatively small.

Moreover, if an innovation, such as ATMs in banking, leads to increased unemployment, none of the social cost – neither the suffering of those who are laid off nor the increased fiscal cost of paying them unemployment benefits – is reflected in firms' profitability. Likewise, our GDP metric does not reflect the cost of the increased insecurity individuals may feel with the increased risk of a loss of a job. Equally important, it often does not accurately reflect the improvement in societal wellbeing resulting from innovation.

In a simpler world, where innovation simply meant lowering the cost of production of, say, a car, it was easy to assess an innovation's value. But when innovation affects a car's quality, the task becomes far more difficult. And this is even more apparent in other arenas: How do we accurately assess the fact that, owing to medical progress, heart surgery is more likely to be successful now than in the past, leading to a significant increase in life expectancy and quality of life?

Still, one cannot avoid the uneasy feeling that, when all is said and done, the contribution of recent technological innovations to long-term growth in living standards may be substantially less than the enthusiasts claim. A lot of intellectual effort has been devoted to devising better ways of maximising advertising and marketing budgets – targeting customers, especially the affluent, who might actually buy the product. But standards of living might have been raised even more if all of this innovative talent had been allocated to more fundamental research – or even to more applied research that could have led to new products.

Yes, being better connected with each other, through Facebook or Twitter, is valuable. But how can we compare these innovations with those like the laser, the transistor, the Turing machine, and the mapping of the human genome, each of which has led to a flood of transformative products?

Of course, there are grounds for a sigh of relief. Although we may not know how much recent technological innovations are contributing to our wellbeing, at least we know that, unlike the wave of financial innovations that marked the pre-crisis global economy, the effect is positive.

Copyright: Project Syndicate, 2014.

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The current economic malaise is the result of flawed policies | Joseph Stiglitz

It is not the result of the inexorable laws of economics, to which we simply must adjust, or even a penance for past sins

Soon after the global financial crisis erupted in 2008, I warned that unless the right policies were adopted, Japanese-style malaise – slow growth and near-stagnant incomes for years to come – could set in.

While leaders on both sides of the Atlantic claimed that they had learned the lessons of Japan, they promptly proceeded to repeat some of the same mistakes. Now, even a key former United States official, the economist Larry Summers, is warning of secular stagnation.

The basic point that I raised a half-decade ago was that, in a fundamental sense, the US economy was sick even before the crisis: it was only an asset-price bubble, created through lax regulation and low interest rates, that had made the economy seem robust.

Beneath the surface, numerous problems were festering: growing inequality; an unmet need for structural reform (moving from a manufacturing-based economy to services and adapting to changing global comparative advantages); persistent global imbalances; and a financial system more attuned to speculating than to making investments that would create jobs, increase productivity, and redeploy surpluses to maximize social returns.

Policymakers' response to the crisis failed to address these issues; worse, it exacerbated some of them and created new ones – and not just in the US. The result has been increased indebtedness in many countries, as the collapse of GDP undermined government revenues. Moreover, underinvestment in both the public and private sector has created a generation of young people who have spent years idle and increasingly alienated at a point in their lives when they should have been honing their skills and increasing their productivity.

On both sides of the Atlantic, GDP is likely to grow considerably faster this year than in 2013. But, before leaders who embraced austerity policies open the champagne and toast themselves, they should examine where we are and consider the near-irreparable damage that these policies have caused.

Every downturn eventually comes to an end. The mark of a good policy is that it succeeds in making the downturn shallower and shorter than it otherwise would have been. The mark of the austerity policies that many governments embraced is that they made the downturn far deeper and longer than was necessary, with long-lasting consequences.

Real (inflation-adjusted) GDP per capita is lower in most of the North Atlantic than it was in 2007; in Greece, the economy has shrunk by an estimated 23%. Germany, the top-performing European country, has recorded miserly 0.7% average annual growth over the last six years. The US economy is still roughly 15% smaller than it would have been had growth continued even on the moderate pre-crisis trajectory.

But even these numbers do not tell the full story of how bad things are, because GDP is not a good measure of success. Far more relevant is what is happening to household incomes. Median real income in the US is below its level in 1989, a quarter-century ago; median income for full-time male workers is lower now than it was more than 40 years ago.

Some, like the economist Robert Gordon, have suggested that we should adjust to a new reality in which long-term productivity growth will be significantly below what it has been over the past century. Given economists' miserable record – reflected in the run-up to the crisis – for even three-year predictions, no one should have much confidence in a crystal ball that forecasts decades into the future. But this much seems clear: unless government policies change, we are in for a long period of disappointment.

Markets are not self-correcting. The underlying fundamental problems that I outlined earlier could get worse – and many are. Inequality leads to weak demand; widening inequality weakens demand even more; and, in most countries, including the US, the crisis has only worsened inequality.

The trade surpluses of northern Europe have increased, even as China's have moderated. Most important, markets have never been very good at achieving structural transformations quickly on their own; the transition from agriculture to manufacturing, for example, was anything but smooth; on the contrary, it was accompanied by significant social dislocation and the Great Depression.

This time is no different, but in some ways it could be worse: the sectors that should be growing, reflecting the needs and desires of citizens, are services like education and health, which traditionally have been publicly financed, and for good reason. But, rather than government facilitating the transition, austerity is inhibiting it.

Malaise is better than a recession, and a recession is better than a depression. But the difficulties that we are facing now are not the result of the inexorable laws of economics, to which we simply must adjust, as we would to a natural disaster, like an earthquake or tsunami. They are not even a kind of penance that we have to pay for past sins – though, to be sure, the neoliberal policies that have prevailed for the past three decades have much to do with our current predicament.

Instead, our current difficulties are the result of flawed policies. There are alternatives. But we will not find them in the self-satisfied complacency of the elites, whose incomes and stock portfolios are once again soaring. Only some people, it seems, must adjust to a permanently lower standard of living. Unfortunately, those people happen to be most people.

Copyright: Project Syndicate, 2014.

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A dismal new year for the global economy | Joseph Stiglitz

Unemployment levels in the US and the eurozone point to a tough 2014 despite some small signs of optimism

Economics is often called the dismal science, and for the last half-decade it has come by its reputation honestly in the advanced economies. Unfortunately, the year ahead will bring little relief.

Real (inflation-adjusted) per capita GDP in France, Greece, Italy, Spain, the United Kingdom, and the United States is lower today than before the Great Recession hit. Indeed, Greece's per capita GDP has shrunk nearly 25% since 2008.

There are a few exceptions: After more than two decades, Japan's economy appears to be turning a corner under Prime Minister Shinzo Abe's government; but, with a legacy of deflation stretching back to the 1990s, it will be a long road back. And Germany's real per capita GDP was higher in 2012 than it was in 2007 – though an increase of 3.9% in five years is not much to boast about.

Elsewhere, though, things really are dismal: unemployment in the eurozone remains stubbornly high and the long-term unemployment rate in the US still far exceeds its pre-recession levels.

In Europe, growth appears set to return this year, though at a truly anaemic rate, with the International Monetary Fund projecting a 1% annual increase in output. In fact, the IMF's forecasts have repeatedly proved overly optimistic: the Fund predicted 0.2% growth for the eurozone in 2013, compared to what is likely to be a 0.4% contraction; and it predicted US growth would reach 2.1%, whereas it now appears to have been closer to 1.6%.

With European leaders wedded to austerity and moving at a glacial pace to address the structural problems stemming from the eurozone's flawed institutional design, it is no wonder that the continent's prospects appear so bleak.

But, on the other side of the Atlantic, there is cause for muted optimism. Revised data for the US indicates that real GDP grew at an annual pace of 4.1% in the third quarter of 2013, while the unemployment rate finally reached 7% in November – the lowest level in five years. A half-decade of low construction has largely worked off the excess building that occurred during the housing bubble. The development of vast reserves of shale energy has moved America toward its long-sought goal of energy independence and reduced gas prices to record lows, contributing to the first glimmer of a manufacturing revival. And a booming high-tech sector has become the envy of the rest of the world.

Most important, a modicum of sanity has been restored to the US political process. Automatic budget cuts – which reduced 2013 growth by as much as 1.75 percentage points from what it otherwise would have been – continue, but in a much milder form. Moreover, the cost curve for health care – a main driver of long-term fiscal deficits – has bent down. Already, the Congressional Budget Office projects that spending in 2020 for Medicare and Medicaid (the government health-care programs for the elderly and the poor, respectively) will be roughly 15% below the level projected in 2010.

It is possible, even likely, that US growth in 2014 will be rapid enough to create more jobs than required for new entrants into the labour force. At the very least, the huge number (roughly 22 million) of those who want a full-time job and have been unable to find one should fall.

But we should curb our euphoria. A disproportionate share of the jobs now being created are low-paying – so much so that median incomes (those in the middle) continue to decline. For most Americans, there is no recovery, with 95% of the gains going to the top 1%.

Even before the recession, American-style capitalism was not working for a large share of the population. The recession only made its rough edges more apparent. Median income (adjusted for inflation) is still lower than it was in 1989, almost a quarter-century ago; and median income for males is lower than it was four decades ago.

America's new problem is long-term unemployment, which affects nearly 40% of those without jobs, compounded by one of the poorest unemployment-insurance systems among advanced countries, with benefits normally expiring after 26 weeks. During downturns, the US Congress extends these benefits, recognizing that individuals are unemployed not because they are not looking for work, but because there are no jobs. But now congressional Republicans are refusing to adapt the unemployment system to this reality; as Congress went into recess for the holidays, it gave the long-term unemployed the equivalent of a pink slip: as 2014 begins, the roughly 1.3 million Americans who lost their unemployment benefits at the end of December have been left to their own devices. Happy new year.

Meanwhile, a major reason that the US unemployment rate is currently as low as it is, is that so many people have dropped out of the labour force. Labour-force participation is at levels not seen in more than three decades. Some say that this largely reflects demographics: an increasing share of the working-age population is over 50, and labour-force participation has always been lower among this group than among younger cohorts.

But this simply recasts the problem: the US economy has never been good at retraining workers. American workers are treated like disposable commodities, tossed aside if and when they cannot keep up with changes in technology and the marketplace. The difference now is that these workers are no longer a small fraction of the population.

None of this is inevitable. It is the result of bad economic policy and even worse social policy, which waste the country's most valuable resource – its human talent – and cause immense suffering for affected individuals and their families. They want to work, but the US economic system is failing them.

So, with Europe's Great Malaise continuing in 2014 and the US recovery excluding all but those at the top, count me dismal. On both sides of the Atlantic, market economies are failing to deliver for most citizens. How long can this continue?

Copyright: Project Syndicate, 2014.

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Only an inveterate optimist would say the worst must be over for the eurozone | Joseph Stiglitz

Try telling people in countries that are still in depression, with per capita GDP below pre-2008 levels and youth unemployment at 50% that the austerity medicine has worked

It has been three years since the outbreak of the euro crisis, and only an inveterate optimist would say that the worst is definitely over.

Some, noting that the eurozone's double-dip recession has ended, conclude that the austerity medicine has worked. But try telling that to those in countries that are still in depression, with per capita GDP still below pre-2008 levels, unemployment rates above 20% and youth unemployment at more than 50%. At the current pace of "recovery" no return to normality can be expected until well into the next decade.

A recent study by Federal Reserve economists concluded that America's protracted high unemployment will have serious adverse effects on GDP growth for years to come. If that is true in the United States, where unemployment is 40% lower than in Europe, the prospects for European growth appear bleak indeed.

What is needed, above all, is fundamental reform in the structure of the eurozone. By now, there is a fairly clear understanding of what is required:

• A real banking union, with common supervision, common deposit insurance, and common resolution; without this, money will continue to flow from the weakest countries to the strongest.

• Some form of debt mutualisation, such as Eurobonds: with Europe's debt/GDP ratio lower than that of the US, the eurozone could borrow at negative real interest rates, as the US does. The lower interest rates would free money to stimulate the economy, breaking the crisis-hit countries' vicious circle whereby austerity increases the debt burden, making debt less sustainable, by shrinking GDP.

• Industrial policies to enable the laggard countries to catch up; this implies revising current strictures, which bar such policies as unacceptable interventions in free markets.

• A central bank that focuses not only on inflation, but also on growth, employment, and financial stability

• Replacing anti-growth austerity policies with pro-growth policies focusing on investments in people, technology, and infrastructure.

Much of the euro's design reflects the neo-liberal economic doctrines that prevailed when the single currency was conceived. It was thought that keeping inflation low was necessary and almost sufficient for growth and stability; that making central banks independent was the only way to ensure confidence in the monetary system; that low debt and deficits would ensure economic convergence among member countries; and that a single market, with money and people flowing freely, would ensure efficiency and stability.

Each of these doctrines has proved to be wrong. The independent US and European central banks performed much more poorly in the run-up to the crisis than less independent banks in some leading emerging markets, because their focus on inflation distracted attention from the far more important problem of financial fragility.

Likewise, Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. The crisis caused the deficits and high debt, not the other way around, and the fiscal constraints that Europe has agreed will neither facilitate rapid recovery from this crisis nor prevent the next one.

Finally, the free flow of people, like the free flow of money, seemed to make sense; factors of production would go to where their returns were highest. But migration from crisis-hit countries, partly to avoid repaying legacy debts (some of which were forced on these countries by the European Central Bank, which insisted that private losses be socialised), has been hollowing out the weaker economies. It can also result in a misallocation of labour.

Internal devaluation – lowering domestic wages and prices – is no substitute for exchange-rate flexibility. Indeed, there is increasing worry about deflation, which increases leverage and the burden of debt levels that are already too high. If internal devaluation were a good substitute, the gold standard would not have been a problem in the Great Depression, and Argentina could have managed to keep the peso's peg to the dollar when its debt crisis erupted a decade ago.

No country has ever restored prosperity through austerity. Historically, a few small countries were lucky to have exports fill the gap in aggregate demand as public expenditure contracted, enabling them to avoid austerity's depressing effects. But European exports have barely increased since 2008 (despite the decline in wages in some countries, most notably Greece and Italy). With global growth so tepid, exports will not restore Europe and America to prosperity any time soon.

Germany and some of the other northern European countries, demonstrating an unseemly lack of European solidarity, have declared that they should not be asked to pick up the bill for their profligate southern neighbours. This is wrong on several counts. For starters, lower interest rates that follow from Eurobonds or some similar mechanism would make the debt burden manageable. The US, it should be recalled, emerged from the second world war with a very high debt burden, but the ensuing years marked the country's most rapid growth ever.

If the eurozone adopts the programme outlined above, there should be no need for Germany to pick up any tab. But under the perverse policies that Europe has adopted, one debt restructuring has been followed by another. If Germany and the other northern European countries continue to insist on pursuing current policies, they, together with their southern neighbours, will wind up paying a high price.

The euro was supposed to bring growth, prosperity, and a sense of unity to Europe. Instead, it has brought stagnation, instability, and divisiveness.

It does not have to be this way. The euro can be saved, but it will take more than fine speeches asserting a commitment to Europe. If Germany and others are not willing to do what it takes – if there is not enough solidarity to make the politics work – then the euro may have to be abandoned for the sake of salvaging the European project.

© Project Syndicate 1995–2013

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Developing countries are right to resist restrictive trade agreements | Joseph Stiglitz

Corporations are attempting to achieve by stealth – through secretly negotiated trade agreements – what they could not attain in an open political process

International investment agreements are once again in the news. The United States is trying to impose a strong investment pact within the two big so-called "partnership" agreements, one bridging the Atlantic, the other the Pacific, that are now being negotiated. But there is growing opposition to such moves.

South Africa has decided to stop the automatic renewal of investment agreements that it signed in the early post-apartheid period, and has announced that some will be terminated. Ecuador and Venezuela have already terminated theirs. India says that it will sign an investment agreement with the US only if the dispute-resolution mechanism is changed. For its part, Brazil has never had one at all.

There is good reason for the resistance. Even in the US, labour unions and environmental, health, development, and other nongovernmental organizations have objected to the agreements that the US is proposing.

The agreements would significantly inhibit the ability of developing countries' governments to protect their environment from mining and other companies; their citizens from the tobacco companies that knowingly purvey a product that causes death and disease; and their economies from the ruinous financial products that played such a large role in the 2008 global financial crisis. They restrict governments even from placing temporary controls on the kind of destabilising short-term capital flows that have so often wrought havoc in financial markets and fuelled crises in developing countries. Indeed, the agreements have been used to challenge government actions ranging from debt restructuring to affirmative action.

Advocates of such agreements claim that they are needed to protect property rights. But countries like South Africa already have strong constitutional guarantees of property rights. There is no reason that foreign-owned property should be better protected than property owned by a country's own citizens.

Moreover, if constitutional guarantees are not enough to convince investors of South Africa's commitment to protecting property rights, foreigners can always avail themselves of expropriation insurance provided by the Multilateral Investment Guarantee Agency (a division of the World Bank) or numerous national organizations providing such insurance. (Americans, for example, can buy insurance from the Overseas Private Investment Corporation.)

But those supporting the investment agreements are not really concerned about protecting property rights, anyway. The real goal is to restrict governments' ability to regulate and tax corporations – that is, to restrict their ability to impose responsibilities, not just uphold rights. Corporations are attempting to achieve by stealth – through secretly negotiated trade agreements – what they could not attain in an open political process.

Even the notion that this is about protecting foreign firms is a ruse: companies based in country A can set up a subsidiary in country B to sue country A's government. American courts, for example, have consistently ruled that corporations need not be compensated for the loss of profits from a change in regulations (a so-called regulatory taking); but, under the typical investment agreement, a foreign firm (or an American firm, operating through a foreign subsidiary) can demand compensation!

Worse, investment agreements enable companies to sue the government over perfectly sensible and just regulatory changes – when, say, a cigarette company's profits are lowered by a regulation restricting the use of tobacco. In South Africa, a firm could sue if it believes that its bottom line might by harmed by programs designed to address the legacy of official racism.

There is a long-standing presumption of "sovereign immunity": states can be sued only under limited circumstances. But investment agreements like those backed by the US demand that developing countries waive this presumption and permit the adjudication of suits according to procedures that fall far short of those expected in 21st century democracies. Such procedures have proved to be arbitrary and capricious, with no systemic way to reconcile incompatible rulings issued by different panels. While proponents argue that investment treaties reduce uncertainty, the ambiguities and conflicting interpretations of these agreements' provisions have increased uncertainty.

Countries that have signed such investment agreements have paid a high price. Several have been subject to enormous suits – and enormous payouts. There have even been demands that countries honor contracts signed by previous non-democratic and corrupt governments, even when the International Monetary Fund and other multilateral organizations have recommended that the contract be abrogated.

Even when developing-country governments win the suits (which have proliferated greatly in the last 15 years), the litigation costs are huge. The (intended) effect is to chill governments' legitimate efforts to protect and advance citizens' interests by imposing regulations, taxation, and other responsibilities on corporations.

Moreover, for developing countries that were foolish enough to sign such agreements, the evidence is that the benefits, if any, have been scant. In South Africa's review, it found that it had not received significant investments from the countries with which it had signed agreements, but had received significant investments from those with which it had not.

It is no surprise that South Africa, after a careful review of investment treaties, has decided that, at the very least, they should be renegotiated. Doing so is not anti-investment; it is pro-development. And it is essential if South Africa's government is to pursue policies that best serve the country's economy and citizens.

Indeed, by clarifying through domestic legislation the protections offered to investors, South Africa is once again demonstrating – as it has repeatedly done since the adoption of its new Constitution in 1996 – its commitment to the rule of law. It is the investment agreements themselves that most seriously threaten democratic decision-making.

South Africa should be congratulated. Other countries, one hopes, will follow suit.

• Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University.

Copyright: Project Syndicate, 2013.

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After the financial crisis we were all Keynesians – but not for long enough

The eurozone may be growing again but, in any meaningful sense, an economy in which most people's incomes are below their pre-2008 levels is still in recession

When the US investment bank Lehman Brothers collapsed in 2008, triggering the worst global financial crisis since the Great Depression, a broad consensus about what caused the crisis seemed to emerge.

A bloated and dysfunctional financial system had misallocated capital and, rather than managing risk, had actually created it. Financial deregulation – together with easy money – had contributed to excessive risk-taking. Monetary policy would be relatively ineffective in reviving the economy, even if still-easier money might prevent the financial system's total collapse. Thus, greater reliance on fiscal policy – increased government spending – would be necessary.

Five years later, while some are congratulating themselves on avoiding another depression, no one in Europe or the United States can claim that prosperity has returned. The European Union is just emerging from a double-dip (and in some countries a triple-dip) recession, and some member states are in depression. In many EU countries, GDP remains lower, or insignificantly above, pre-recession levels. Almost 27 million Europeans are unemployed.

Similarly, 22 million Americans who would like a full-time job cannot find one. Labour-force participation in the US has fallen to levels not seen since women began entering the labour market in large numbers. Most Americans' income and wealth are below their levels long before the crisis. Indeed, a typical full-time male worker's income is lower than it has been in more than four decades.

Yes, we have done some things to improve financial markets. There have been some increases in capital requirements – but far short of what is needed. Some of the risky derivatives – the financial weapons of mass destruction – have been put on exchanges, increasing their transparency and reducing systemic risk; but large volumes continue to be traded in murky over-the-counter markets, which means that we have little knowledge about some of our largest financial institutions' risk exposure.

Likewise, some of the predatory and discriminatory lending and abusive credit-card practices have been curbed; but equally exploitative practices continue. The working poor still are too often exploited by usurious payday loans. Market-dominant banks still extract hefty fees on debit and credit-card transactions from merchants, who are forced to pay a multiple of what a truly competitive market would bear. These are, quite simply, taxes, with the revenues enriching private coffers rather than serving public purposes.

Other problems have gone unaddressed – and some have worsened. America's mortgage market remains on life-support: the government now underwrites more than 90% of all mortgages, and President Barack Obama's administration has not even proposed a new system that would ensure responsible lending at competitive terms. The financial system has become even more concentrated, exacerbating the problem of banks that are not only too big, too interconnected, and too correlated to fail, but that are also too big to manage and be held accountable. Despite scandal after scandal, from money laundering and market manipulation to racial discrimination in lending and illegal foreclosures, no senior official has been held accountable; when financial penalties have been imposed, they have been far smaller than they should be, lest systemically important institutions be jeopardised.

The credit ratings agencies have been held accountable in two private suits. But here, too, what they have paid is but a fraction of the losses that their actions caused. More importantly, the underlying problem – a perverse incentive system whereby they are paid by the firms that they rate – has yet to change.

Bankers boast of having paid back in full the government bailout funds that they received when the crisis erupted. But they never seem to mention that anyone who got huge government loans with near-zero interest rates could have made billions simply by lending that money back to the government. Nor do they mention the costs imposed on the rest of the economy – a cumulative output loss in Europe and the US that is well in excess of $5 trillion.

Meanwhile, those who argued that monetary policy would not suffice turned out to have been right. Yes, we were all Keynesians – but all too briefly. Fiscal stimulus was replaced by austerity, with predictable – and predicted – adverse effects on economic performance.

Some in Europe are pleased that the economy may have bottomed out. With a return to output growth, the recession – defined as two consecutive quarters of economic contraction – is officially over. But, in any meaningful sense, an economy in which most people's incomes are below their pre-2008 levels is still in recession. And an economy in which 25% of workers (and 50% of young people) are unemployed – as is the case in Greece and Spain – is still in depression. Austerity has failed, and there is no prospect of a return to full employment any time soon (not surprisingly, prospects for America, with its milder version of austerity, are better).

The financial system may be more stable than it was five years ago, but that is a low bar – back then, it was teetering on the edge of a precipice. Those in government and the financial sector who congratulate themselves on banks' return to profitability and mild – though hard-won – regulatory improvements should focus on what still needs to be done. The glass is, at most, only one-quarter full; for most people, it is three-quarters empty.

Copyright: Project Syndicate, 2013.

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We need a fair system for restructuring sovereign debt | Joseph Stiglitz

If the debt vultures have their way, there will never be a fresh start for indebted countries - and no one will agree to restructuring

A recent decision by a United States appeals court threatens to upend global sovereign debt markets. It may even lead to the US no longer being viewed as a good place to issue sovereign debt. At the very least, it renders non-viable all debt restructurings under the standard debt contracts. In the process, a basic principle of modern capitalism – that when debtors cannot pay back creditors, a fresh start is needed – has been overturned.

The trouble began a dozen years ago, when Argentina had no choice but to devalue its currency and default on its debt. Under the existing regime, the country had been on a rapid downward spiral of the kind that has now become familiar in Greece and elsewhere in Europe. Unemployment was soaring, and austerity, rather than restoring fiscal balance, simply exacerbated the economic downturn.

Devaluation and debt restructuring worked. In subsequent years, until the global financial crisis erupted in 2008, Argentina's annual GDP growth was 8% or higher, one of the fastest rates in the world.

Even former creditors benefited from this rebound. In a highly innovative move, Argentina exchanged old debt for new debt – at about 30 cents on the dollar or a little more – plus a GDP-indexed bond. The more Argentina grew, the more it paid to its former creditors.

Argentina's interests and those of its creditors were thus aligned: both wanted growth. It was the equivalent of a "Chapter 11" restructuring of American corporate debt, in which debt is swapped for equity, with bondholders becoming new shareholders.

Debt restructurings often entail conflicts among different claimants. That is why, for domestic debt disputes, countries have bankruptcy laws and courts. But there is no such mechanism to adjudicate international debt disputes.

Once upon a time, such contracts were enforced by armed intervention, as Mexico, Venezuela, Egypt, and a host of other countries learned at great cost in the nineteenth and early twentieth centuries. After the Argentine crisis, President George W. Bush's administration vetoed proposals to create a mechanism for sovereign-debt restructuring. As a result, there is not even the pretence of attempting fair and efficient restructurings.

Poor countries are typically at a huge disadvantage in bargaining with big multinational lenders, which are usually backed by powerful home-country governments. Often, debtor countries are squeezed so hard for payment that they are bankrupt again after a few years.

Economists applauded Argentina's attempt to avoid this outcome through a deep restructuring accompanied by the GDP-linked bonds. But a few "vulture" funds – most notoriously the hedge fund Elliott Management, headed by the billionaire Paul E. Singer – saw Argentina's travails as an opportunity to make huge profits at the expense of the Argentine people. They bought the old bonds at a fraction of their face value, and then used litigation to try to force Argentina to pay 100 cents on the dollar.

Americans have seen how financial firms put their own interests ahead of those of the country – and the world. The vulture funds have raised greed to a new level.

Their litigation strategy took advantage of a standard contractual clause (called pari passu) intended to ensure that all claimants are treated equally. Incredibly, the US Court of Appeals for the Second Circuit in New York decided that this meant that if Argentina paid in full what it owed those who had accepted debt restructuring, it had to pay in full what it owed to the vultures.

If this principle prevails, no one would ever accept debt restructuring. There would never be a fresh start – with all of the unpleasant consequences that this implies.

In debt crises, blame tends to fall on the debtors. They borrowed too much. But the creditors are equally to blame – they lent too much and imprudently. Indeed, lenders are supposed to be experts on risk management and assessment, and in that sense, the onus should be on them. The risk of default or debt restructuring induces creditors to be more careful in their lending decisions.

The repercussions of this miscarriage of justice may be felt for a long time. After all, what developing country with its citizens' long-term interests in mind will be prepared to issue bonds through the US financial system, when America's courts – as so many other parts of its political system – seem to allow financial interests to trump the public interest?

Countries would be well advised not to include pari passu clauses in future debt contracts, at least without specifying more fully what is intended. Such contracts should also include collective-action clauses, which make it impossible for vulture funds to hold up debt restructuring. When a sufficient proportion of creditors agree to a restructuring plan (in the case of Argentina, the holders of more than 90% of the country's debt did), the others can be forced to go along.

The fact that the International Monetary Fund, the US Department of Justice, and anti-poverty NGOs all joined in opposing the vulture funds is revealing. But so, too, is the court's decision, which evidently assigned little weight to their arguments.

For those in developing and emerging-market countries who harbor grievances against the advanced countries, there is now one more reason for discontent with a brand of globalization that has been managed to serve rich countries' interests (especially their financial sectors' interests).

In the aftermath of the global financial crisis, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System urged that we design an efficient and fair system for the restructuring of sovereign debt. The US court's tendentious, economically dangerous ruling shows why we need such a system now.

• Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. His most recent book is The Price of Inequality: How Today's Divided Society Endangers our Future.

Copyright: Project Syndicate, 2013.

Government borrowingEconomicsBondsGlobal economyArgentinaHedge fundsUnited StatesJoseph Stiglitz
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So-called free trade talks should be in the public, not corporate interest | Joseph Stiglitz

Instead a negotiation process that is neither democratic and or transparent is likely to perpetuate a managed trade regime

Though nothing has come of the World Trade Organisation's Doha development round of global trade negotiations since they were launched almost a dozen years ago, another round of talks is in the works. This time the negotiations will not be held on a global, multilateral basis. Rather, two huge regional agreements – one transpacific, and the other transatlantic – are to be negotiated. Are the coming talks likely to be more successful?

The Doha round was torpedoed by the US refusal to eliminate agricultural subsidies – a sine qua non for any true development round, given that 70% of those in the developing world depend on agriculture directly or indirectly. The US position was truly breathtaking, given that the WTO had already judged that America's cotton subsidies – paid to fewer than 25,000 rich farmers – were illegal. Washington's response was to bribe Brazil, which had brought the complaint, not to pursue the matter further, leaving in the lurch millions of poor cotton farmers in sub-Saharan Africa and India, who suffer from depressed prices because of America's largesse to its wealthy farmers.

Given this recent history, it now seems clear that the negotiations to create a free trade area between the US and Europe, and another between the US and much of the Pacific (except for China), are not about establishing a true free trade system. Instead, the goal is a managed trade regime – managed, that is, to serve the special interests that have long dominated trade policy in the west.

There are a few basic principles that those entering the discussions will, one hopes, take to heart. First, any trade agreement has to be symmetrical. If, as part of the Trans-Pacific Partnership (TPP), the US demands that Japan eliminate its rice subsidies, Washington should, in turn, offer to eliminate its production (and water) subsidies, not just on rice (which is relatively unimportant in the US) but on other agricultural commodities as well.

Second, no trade agreement should put commercial interests ahead of broader national interests, especially when non-trade-related issues like financial regulation and intellectual property are at stake. America's trade agreement with Chile, for example, impedes Chile's use of capital controls, even though the International Monetary Fund now recognises that they can be an important instrument of macro-prudential policy.

Other trade agreements have insisted on financial liberalisation and deregulation as well, even though the 2008 crisis should have taught us that the absence of good regulation can jeopardise economic prosperity. America's pharmaceutical industry, which wields considerable clout with the office of the US Trade Representative (USTR), has succeeded in foisting on other countries an unbalanced intellectual property regime, which, designed to fight generic drugs, puts profit ahead of saving lives. Even the US supreme court has now said that the US Patent Office went too far in granting patents on genes.

Finally, there must be a commitment to transparency. Those engaging in these trade negotiations should be forewarned. The US is committed to a lack of transparency. The USTR's office has been reluctant to reveal its negotiating position even to members of the US Congress – and on the basis of what has been leaked, one can understand why. It is backtracking on principles – for example, access to generic medicines – that Congress had inserted into earlier trade agreements, such as that with Peru.

In the case of the TPP, there is a further concern. Asia has developed an efficient supply chain, with goods flowing easily from one country to another in the process of producing finished items. The TPP could interfere with that if China remains outside of it.

With formal tariffs already so low, negotiators will focus largely on non-tariff barriers, such as regulatory ones. But the USTR's office, representing corporate interests, will almost surely push for the lowest common standard, levelling downward rather than upward. For example, many countries have tax and regulatory provisions that discourage large automobiles – not because they are trying to discriminate against US goods, but because they worry about pollution and energy efficiency.

The more general point, alluded to earlier, is that trade agreements typically put commercial interests ahead of other values – the right to a healthy life and protection of the environment, to name just two. France, for example, wants a "cultural exception" in trade agreements that would allow it to continue to support its films – from which the whole world benefits. This and other broader values should be non-negotiable.

Indeed, the irony is that the social benefits of such subsidies are enormous, while the costs are negligible. Does anyone really believe that a French art film represents a serious threat to a Hollywood summer blockbuster? Yet Hollywood's greed knows no limit, and America's trade negotiators take no prisoners. And that's precisely why such items should be taken off the table before negotiations begin. Otherwise arms will be twisted, and there is a real risk that an agreement will sacrifice basic values to commercial interests.

If negotiators created a genuine free trade regime that put the public interest first, with the views of ordinary citizens given at least as much weight as those of corporate lobbyists, I might be optimistic that what would emerge would strengthen the economy and improve social well-being. The reality, however, is that we have a managed trade regime that puts corporate interests first, and a process of negotiations that is undemocratic and non-transparent.

The likelihood that what emerges from the coming talks will serve ordinary Americans' interests is low. The outlook for ordinary citizens in other countries is even bleaker.

© Project Syndicate 1995–2013

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Mark Carney: what should he do now? Our panel's verdict | The panel

Our panel of experts share their advice for the incoming Bank of England governor as he starts his first day in the job

Patricia Croft: 'Act as an agent of change'

Expectations are high as Mark Carney, the so-called rock star of central banking, takes the helm at the Bank of England. He will be missed. Canada came out of the financial and economic crises of 2007/08 relatively unscathed. And rightly or wrongly, most of that credit lands at the feet of Mark Carney. He acted decisively, slashing interest rates and working closely with bank regulators to ensure the health of our banking system. But to be fair, he also benefited from a highly regulated, concentrated banking system and the credibility of some 20 years of successful inflation targeting. Nonetheless, Canadians listened to him and respected him as a strong and very visible leader of the central bank. He did not shy away from controversy, admonishing Canadian companies' propensity to hoard cash, and wading into the income inequality issue by voicing his support for the Occupy movement.

Are the lessons learned in Canada transferable to the UK? The Bank of England now has responsibility as head regulator for the financial system – Carney's experience in Canada coupled with his role as head of the G20 financial stability board will stand him in good stead. But his powers of persuasion will be put to the test as a key difference is that in the UK he will have just one vote on monetary policy. His appointment of a female Bank COO may be a taste of things to come. My advice to Carney is to continue to act as an agent of change, remembering they are never popular. Outgoing governor King clearly opposed forward guidance and monetary policy activism. Carney will no doubt use all his talents of leadership and communications to try to change this. The UK needs Carney; economic growth is weak, inflation is high and the banking system is struggling to rise above recent scandals. He is the right man for the job, but expectations are very high. Nonetheless, I have no doubt Carney will succeed if the UK lets him.

• Patricia Croft is the founder of Croft Consulting and the former chief economist of Royal Bank of Canada Global Asset Management

Joseph Stiglitz: 'Make banks fulfil their responsibility to society'

An excessive, almost exclusive, focus on inflation by many central banks has not served our economies well. A more comprehensive mandate, along the US model – inflation, employment, growth, and financial stability, would make the task that confronts bankers such as Mark Carney easier. With the threat of recession, slow growth and unemployment predominating, these should be where attention should be centred. Low interest rates help the economy by lowering the exchange rate, but would help even more if they were translated into more availability of credit at favourable terms, for example, to small businesses and potential homeowners. The credit channel has to be strengthened. And that means banks need to be reorientated back to their traditional functions of lending, not trading (including in derivatives), speculation, market manipulation, etc. Doing so would at the same time help create a more stable financial system.

A more competitive banking system too would help in both regards: in most western countries, too big to fail, too interconnected to fail, and too correlated to fail financial systems pose an ongoing threat, one which has become worse in the aftermath of the crisis. These banks are not only to big to fail, but have shown themselves too big to manage, too big to be held accountable, too big to be brought to justice.

Financial stability would be enhanced too by substantial increases in capital requirements. The regulatory framework of Basel III should be viewed as a minimum standard, not a maximum. The central insight of modern financial theory, that of Modigliani and Miller, was that increasing leverage simply shifts more risk to equity, and on to the public, as we saw in the 2008 crisis – it doesn't make something out of nothing.

Making the financial system safer, more accountable, more responsible, more likely to full its societal role should be among the central missions of the Bank. It will require deeper and continuing reforms and monitoring. It will require, in addition to all the other changes noted above, prohibitions on bonus schemes that incentivise excessive risk-taking and short-sighted behaviour.

In the days before the crisis, there was excessive faith in the efficiency and stability of markets, in the notion that keeping inflation low and stable was necessary, and almost sufficient, to attain sustained high growth, that monetary policy did and should exercise its influence mainly through interest rates.

We now know all too well the deficiencies of these models. The failures were not just "an accident", the consequence of a once-in-a-century flood. They were systemic. US monetary authorities have taken the lead in forging strong policies to help get the economy out of the hole that they had helped dig, but they have done little to create a framework for stable growth going forward. Carney's challenge will be to respond to the exigencies of the moment – made more difficult by the travails at his doorstep in Europe, which are likely only to get worse – at the same time as creating a new policy framework ensuring stability with full employment and high growth.

• Joseph Stiglitz is a recipient of the Nobel prize in economics and former chief economist at the World Bank

Merryn Somerset Webb: 'Stop transferring wealth to the rich via QE'

Mark Carney is the great hope of the British political establishment. The idea is that he will bring dynamic innovation to our monetary policy. He is expected to reject out of hand the notion that the various strategies of begging banks to take almost free money, lowering interest rates to one quarter of their previous record level since 1700 and printing hundreds of billions of pounds somehow means that policy is "maxed out". The idea is that he then uses our economy as a testing ground for some kind of mother-of-all-money-creation-experiments that will lift us out of recession and back into a fantasy land of fixed banks and fast growth.

He shouldn't do it. It is easy to see why we started down the QE road. Back in 2008, with our banks mainly insolvent and crisis looming, Mervyn King would have felt he had no choice but to do whatever it took to keep the system from imploding. But QE comes with horrible side effects, the worst one being that it effectively acts as if it were a regressive fiscal policy rather than a monetary policy. By that I mean that it shifts wealth from the poor to the rich. QE is supposed to work in many ways – providing cover for the banks to slowly fix their balance sheets and keeping the supply of money constant even as the big banks contract lending (which cuts the money supply). However one of its main consequences is to keep asset prices high as all the new money leaks into prime property prices, stocks, bonds, farmland, art and the like.

And who owns these assets? It isn't the poor. No, for them the effect of QE comes more in the form of non-existent interest rates on their savings, the steady erosion of the real value of their fixed wages to say nothing of the rise in the gap between the housing accommodation they can afford and the accommodation they want. It is, in the end, as the Bank acknowledged last year, a clear wealth transfer to the already rich. That's something of a moral problem. But it is also something that should now be voted on at a parliamentary level rather than just waved through by a desperate chancellor. So what Mark Carney should do is to acknowledge that transferring wealth and propping up stock markets is the only thing we know – so far – that QE can do. Given that the economy is not a machine but the sum of many million people's worth of generally irrational behaviour, the rest is guesswork. Then he should say firmly that the transfer of wealth in the UK is none of his business. And stop it.

• Merryn Somerset Webb is editor in chief of MoneyWeek

Adam Posen: 'Stop buying gilts'

The impact of monetary policy depends on what a central bank buys, and what institutions it transacts with. The Federal Reserve is demonstrating this fact with the huge impact on US residential construction of its purchases of mortgage-backed securities over the last year; the Bank of Japan is putting this principle into action by buying long-duration Japanese government bonds as opposed to cash, purchases of which previously failed to counter deflation. It is time for the monetary policy committee (MPC) with its new governor to observe the examples around them, and listen to the longstanding arguments of current and past committee members for buying something other than gilts.

The Bank of England should be buying securitised bundles of small, medium and new enterprise debt, as I first proposed in September 2011. The more different from cash the asset that the MPC buys is, the bigger the impact its purchases will have on the economy; the more the MPC concentrates its purchases on where British financial markets are dysfunctional, the bigger the impact as well. Both these factors direct the banks towards SME lending. The highly concentrated British banking system, dominated by four big banks and one big mutual society, has largely forgotten about high-street lending, at least to businesses. The funding for lending scheme (FLS), while clever and well-intentioned, was intended to go through that existing banking system rather than around it, and thus was ineffective.

Governor Carney and the MPC will be tempted instead, for several reasons, to stick with some form of announcement by August that rates will not rise until certain targets are met. There are MPC members who think further QE is ineffective or harmful; there are those who think the UK economy is turning around; there are those who want to keep the Bank from taking on credit risk. Every one of these reasons, however, is misguided: credit easing will be more effective than QE or FLS while addressing a structural problem; the UK economy is still a huge way from overheating, let alone full employment or accelerating inflation; and central banks, including the Bank of England, have bought and sold private assets throughout history. Stopping at cheap talk will not be enough, and the time for giving credit where it's overdue has come.

• Adam Posen is president of the Peterson Institute for International Economics, Washington DC. From 2009 to 2012 he was an external member of the Bank of England's monetary policy committee

Richard Koo: 'Tell the UK that it cannot afford fiscal consolidation'

Unlike the former leadership of the Bank of England, who initially belittled the lessons from Japan and believed that a bold monetary easing would quickly turn the post-Lehman UK economy around, Mark Carney was one of the first central bank governors who took the concept of balance-sheet recession seriously, a concept that was developed to explain Japan's predicament. In particular, Japan was suffering from its private sector minimising debt instead of maximising profits following the bursting of its debt-financed bubble.

But when the private sector as a whole is trying to remove its debt overhang by saving money (including paying down debt) even at zero interest rates, monetary policy loses its effectiveness because borrowers with balance sheets underwater are neither willing nor able to increase their borrowing in response to central bank easing. The economy then enters a deflationary spiral unless government acts as "borrower of last resort" and takes up and spends the unborrowed savings in the private sector.

Today, instead of increasing borrowing in response to record low interest rates, the private sector in the UK is saving a shocking 6.6% of GDP. The same figure for the US is 8.4%, Ireland 5.4% and Spain 15.6% (all Q4 2012 figures seasonally adjusted). These are absolutely horrendous numbers and indicate that all of these economies are squarely in balance-sheet recessions. Since neither the government nor the central bank can force the private sector not to repair its balance sheets, Carney would do well to explain to the British public why the effectiveness of monetary policy is limited in this highly unusual recession. He should also argue along the lines of the US Fed chairman Ben Bernanke's warning on the "fiscal cliff" that the UK cannot afford fiscal consolidation until its private-sector deleveraging is completed. He should deliver this massage even if Messrs Cameron and Osborne don't want to hear it.

Carney should also think of the ways to mop up the massive liquidity injected by his predecessor via quantitative easing before it is too late. Viewed as a multiple of required reserves, there is enough liquidity in the banking system today to increase money supply by 10 times in the UK, 16 times in the US and six times in Japan. This liquidity will do no harm as long as the private sector as a whole is deleveraging. But we are also facing potential inflation rates of 600%, 1000% and 1600% when those respective private sectors return to profit maximisation. Bringing this massive genie back into the bottle without destroying the bond market and the economy is a challenge only a person of Carney's calibre can possibly handle.

• Richard Koo is chief economist at the Nomura Research Institute, Tokyo

Mark CarneyBank of EnglandEconomicsBankingBanking reformFinancial sectorJoseph StiglitzPatricia CroftMerryn Somerset WebbRichard KooAdam Posen
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Sub-Saharan Africa's Eurobond borrowing spree gathers pace | Joseph Stiglitz and Hamid Rashid

Why are an increasing number of developing countries resorting to expensive sovereign-bond issues?

In recent years, a growing number of African governments have issued Eurobonds, diversifying away from traditional sources of finance such as concessional debt and foreign direct investment. Taking the lead in October 2007, when it issued a $750m (£485m) Eurobond with an 8.5% coupon rate, Ghana earned the distinction of being the first Sub-Saharan country – other than South Africa – to issue bonds in 30 years.

This debut Sub-Saharan issue, which was four times oversubscribed, sparked a sovereign borrowing spree in the region. Nine other countries – Gabon, the Democratic Republic of the Congo, Côte d'Ivoire, Senegal, Angola, Nigeria, Namibia, Zambia, and Tanzania – followed suit. By February 2013, these 10 African economies had collectively raised $8.1bn from their maiden sovereign-bond issues, with an average maturity of 11.2 years and an average coupon rate of 6.2%. These countries' existing foreign debt, by contrast, carried an average interest rate of 1.6% with an average maturity of 28.7 years.

It is no secret that sovereign bonds carry significantly higher borrowing costs than concessional debt does. So why are an increasing number of developing countries resorting to sovereign-bond issues? And why have lenders suddenly found these countries desirable?

With quantitative easing having driven interest rates to record lows, one explanation is that this is just another, more obscure manifestation of investors' search for yield. Moreover, recent analyses, carried out in conjunction with the establishment of the new Brics bank, have demonstrated the woeful inadequacy of official assistance and concessional lending for meeting Africa's infrastructure needs, let alone for achieving the levels of sustained growth needed to reduce poverty significantly.

Moreover, the conditionality and close monitoring typically associated with the multilateral institutions make them less attractive sources of financing. What politician wouldn't prefer money that gives him more freedom to do what he likes? It will be years before any problems become manifest – and, then, some future politician will have to resolve them.

To the extent that this new lending is based on Africa's strengthening economic fundamentals, the recent spate of sovereign-bond issues is a welcome sign. But here, as elsewhere, the record of private-sector credit assessments should leave one wary. So, are shortsighted financial markets, working with shortsighted governments, laying the groundwork for the world's next debt crisis?

The risks will undoubtedly grow if sub-national authorities and private-sector entities gain similar access to the international capital markets, which could result in excessive borrowing. Nigerian commercial banks have already issued international bonds; in Zambia, the power utility, railway operator, and road builder are planning to issue as much as $4.5bn in international bonds.

Evidence of either irrational exuberance or market expectations of a bailout is already mounting. How else can one explain Zambia's ability to lock in a rate that was lower than the yield on a Spanish bond issue, even though Spain's credit rating is four grades higher? Indeed, except for Namibia, all of these Sub-Saharan sovereign-bond issuers have "speculative" credit ratings, putting their issues in the "junk bond" category and signalling significant default risk.

Signs of default stress are already showing. In March 2009 – less than two years after the issue – Congolese bonds were trading for 20 cents on the dollar, pushing the yield to a record high. In January 2011, Côte d'Ivoire became the first country to default on its sovereign debt since Jamaica in January 2010.

In June 2012, Gabon delayed the coupon payment on its $1bn bond, pending the outcome of a legal dispute, and was on the verge of a default. Should oil and copper prices collapse, Angola, Gabon, Congo, and Zambia may encounter difficulties in servicing their sovereign bonds.

To ensure that their sovereign-bond issues do not turn into a financial disaster, these countries should put in place a sound, forward-looking, and comprehensive debt-management structure. They need not only to invest the proceeds in the right type of high-return projects, but also to ensure that they do not have to borrow further to service their debt.

These countries can perhaps learn from the bitter experience of Detroit, which issued $1.4bn worth of municipal bonds in 2005 to ward off an impending financial crisis. Since then, the city has continued to borrow, mostly to service its outstanding bonds. In the process, four Wall Street banks that enabled Detroit to issue a total of $3.7bn in bonds since 2005 have reaped $474m in underwriting fees, insurance premiums, and swaps.

Understanding the risks of excessive private-sector borrowing, the inadequacy of private lenders' credit assessments, and the conflicts of interest that are endemic in banks, Sub-Saharan countries should impose constraints on such borrowing, especially when there are significant exchange-rate and maturity mismatches.

Countries contemplating joining the bandwagon of sovereign-bond issuers would do well to learn the lessons of the all-too-frequent debt crises of the past three decades. Matters may become even worse in the future, because so-called "vulture" funds have learned how to take full advantage of countries in distress. Recent court rulings in the United States have given the vultures the upper hand, and may make debt restructuring even more difficult, while enthusiasm for bailouts is clearly waning. The international community may rightly believe that both borrowers and lenders have been forewarned.

There are no easy, risk-free paths to development and prosperity. But borrowing money from international financial markets is a strategy with enormous downside risks, and only limited upside potential – except for the banks, which take their fees up front. Sub-Saharan Africa's economies, one hopes, will not have to repeat the costly lessons that other developing countries have learned over the past three decades.

• Joseph Stiglitz is a Nobel laureate in economics and professor at Columbia University. Hamid Rashid is a senior economic adviser at the United Nations Department of Economic and Social Affairs

© Project Syndicate 1995–2013

AfricaEconomicsJoseph Stiglitz
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