Co-operation not competition – Joseph Stiglitz on the state and the market
The key to successful development over the next 30 years will be to try and find the right balance between the role of the state and the role of the market. So argues Joseph Stiglitz in an interview he gave at our 30th anniversary conference on ‘Mapping the Future of development economics’.
He suggests that development economics may have traditionally given the market too much credit, focusing on state failures and market success. Stiglitz argues that in many cases markets have not done their job very well, pointing to the enormous chaos of the financial crisis in 2008, from which many countries have not yet recovered.
Development success, and development failure
Over the last three decades we have seen successes. East Asia’s unprecedented growth rates and reductions in poverty were beyond anything imaginable. However we have also seen failures. Many of the countries that have tried to transition away from communism, as well as numerous former colonies in Africa, have failed to grow and transform their economies and are now stagnating.
The state has a central role in development
The ‘developmental state’ played a central role in the successes in East Asia, with state actors intervening to direct and promote the growth of domestic industry. Conversely, the developmental failures of the past 30 years can be seen, Stiglitz argues, as the result of the Washington Consensus. World Bank and IMF policies that called for a very limited role of the state meant that states did not have, and could not develop, the capacity necessary to play the supporting role that Stiglitz sees as absolutely essential for successful development.
Governance, a neglected concept 30 years ago is central today
Stiglitz argues that we now know that markets on their own are neither efficient nor stable, and that therefore there needs to be a set of regulations to govern them. It is clear that markets should not, cannot, and do not, exist in a vacuum. We shouldn’t discuss the role of the market versus the state, but instead discuss how the state and market can be mutually supportive.
The role of an honest economist
Stiglitz finishes by suggesting that the role of an honest economist is to lay out what we know and what we don’t know. For example, many used to think that greater equality could only be achieved at the expense of economic growth. Stiglitz argues that we know now this is wrong, and there is evidence that we could have both more equality and more economic growth. To avoid repeating this kind of mistake economists need to be more modest when making claims about what we know and what we don’t know.