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	Alternatives to Austerity by Joseph E. Stiglitz Columbia University & agencies USA   Jan 2011   My new year"s hope is that we stop listening to those calling for austerity and use some common sense to restructure debt.   For Europe and the United States, 2010 was a year of disappointment. It"s been three years since the bubble burst, and more than two since Lehman Brothers collapse. In 2009, we were pulled back from the brink of depression, and 2010 was supposed to be the year of transition: as the economy got back on its feet, stimulus spending could smoothly be brought down.   Growth, it was thought, might slow slightly in 2011, but it would be a minor bump on the way to robust recovery. We could then look back at the "great recession" as a bad dream; the market economy – supported by prudent government action – would have shown its resilience.   In fact, 2010 was a nightmare. The crises in Ireland and Greece called into question the euro"s viability and raised the prospect of a debt default. On both sides of the Atlantic, unemployment remained stubbornly high, at around 10%. Even though 10% of US households with mortgages had already lost their homes, the pace of foreclosures appeared to be increasing – or would have, were it not for legal snafus that raised doubts about America"s vaunted "rule of law".   Unfortunately, the new year"s resolutions made in Europe and America were the wrong ones. The response to the private sector failures and profligacy that had caused the crisis was to demand public sector austerity. The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels. There will also be a decline in competitiveness. While China has kept its economy going by making investments in education, technology and infrastructure, Europe and America have been cutting back.   It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice – the poor and future generations. To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: approximately a quarter of all income in the US now goes to the top 1%, while most Americans income is lower today than it was a dozen years ago. Simply put, most Americans didn"t share in what many called the "great moderation", but was really the mother of all bubbles. So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?   Europe and America have the same talented people, the same resources and the same capital that they had before the recession. They may have overvalued some of these assets; but the assets are, by and large, still there. Private financial markets misallocated capital on a massive scale in the years before the crisis and the waste resulting from underutilisation of resources has been even greater since the crisis began. The question is, how do we get these resources back to work?   Debt restructuring – writing down the debts of homeowners and, in some cases, governments – will be key. It will eventually happen. But delay is very costly – and largely unnecessary.   Banks never wanted to admit to their bad loans and now they don"t want to recognise the losses, at least not until they can adequately recapitalise themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs. The financial sector will press governments to ensure full repayment, even when it leads to massive social waste, huge unemployment and high social distress – and even when it is a consequence of their own mistakes in lending.   But, as we know from experience, there is life after debt restructuring. No one would wish the trauma that Argentina went through in 1999-2002 on any other country. But the country also suffered in the years before the crisis – years of IMF bailouts and austerity – from high unemployment and poverty rates and low and negative growth.   Since the debt restructuring and currency devaluation, Argentina has had years of extraordinarily rapid GDP growth, with the annual rate averaging nearly 9% from 2003 to 2007. By 2009, national income was twice what it was at the nadir of the crisis, in 2002, and more than 75% above its pre-crisis peak.   Likewise, Argentina"s poverty rate has fallen by some three-quarters from its crisis peak, and the country weathered the global financial crisis far better than the US did – unemployment is high, but still only around 8%. We could only conjecture what would have happened if it had not postponed the day of reckoning for so long – or if it had tried to put it off further.   So this is my hope for the new year: we stop paying attention to the so-called financial wizards who got us into this mess – and who are now calling for austerity and delayed restructuring – and start using a little common sense. If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it.   Dec 2010   In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties about their growing national debts.   In many countries, this is leading to a new round of austerity – policies that will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery.   Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits.   The attempt to restrain the growth of debt does serve to concentrate the mind – it forces countries to focus on priorities and assess values. The United States is unlikely in the short term to embrace massive budget cuts, à la the United Kingdom. But the long-term prognosis – made especially dire by health-care reform’s inability to make much of a dent in rising medical costs – is sufficiently bleak that there is increasing bipartisan momentum to do something. President Barack Obama has appointed a bipartisan deficit-reduction commission, whose chairmen recently provided a glimpse of what their report might look like.   Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes. It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible.   In the US (and some other advanced industrial countries), any deficit-reduction agenda has to be set in the context of what happened over the last decade: A massive increase in defense expenditures, fueled by two wars, but going well beyond that.   Growth in inequality, with the top 1% garnering more than 20% of the country’s income, accompanied by a weakening of the middle class – median US household income has fallen by more than 5% over the past decade, and was in decline even before the recession.   Underinvestment in the public sector, including in infrastructure, evidenced so dramatically by the collapse of New Orleans’ levies; and growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies, even when those subsidies have been ruled illegal by the World Trade Organization.   As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. Five core ingredients are required.   First, spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run. What business wouldn’t jump at investment opportunities yielding returns in excess of 10% if it could borrow capital – as the US government can – for less than 3% interest?   Second, military expenditures must be cut – not just funding for the fruitless wars, but also for the weapons that don’t work against enemies that don’t exist. We’ve continued as if the Cold War never came to an end, spending as much on defense as the rest of the world combined.   Following this is the need to eliminate corporate welfare. Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly in the Great Recession with the bailouts of AIG, Goldman Sachs, and other banks. Corporate welfare accounts for nearly one-half of total income in some parts of US agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers – while lowering prices and increasing poverty among competitors in the developing world.   An especially egregious form of corporate special treatment is that afforded to the drug companies. Even though the government is the largest buyer of their products, it is not allowed to negotiate prices, thereby fueling an estimated increase in corporate revenues – and costs to the government – approaching $1 trillion dollars over a decade.   Another example is the smorgasbord of special benefits provided to the energy sector, especially oil and gas, thereby simultaneously robbing the treasury, distorting resource allocation, and destroying the environment. Then there are the seemingly endless giveaways of national resources – from the free spectrum provided to broadcasters to the low royalties levied on mining companies to the subsidies to lumber companies.   Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed. Why should those who work for a living be subject to higher tax rates than those who reap their livelihood from speculation (often at the expense of others)?   Finally, with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillion over the course of a decade.   A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands. It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class.   There’s only one problem: it wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking. Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted.   * Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics. Visit the related web page
	UN report urges changes in support structures for poor countries by UN Conference on Trade and Development (UNCTAD)   25 November 2010   Current international support measures for the least developed countries (LDCs) have failed to accelerate their growth and development and significant changes are needed to ensure better support structures for the poorer States, according to a new United Nations report unveiled.   The Least Developed Countries Report 2010, released by the UN Conference on Trade and Development (UNCTAD), analyses development in the LDCs over the last decade, addressing the issue of how the international community can best support the world''s poorest and most vulnerable countries.   “The current international support measures for LDCs have not been sufficient for accelerating growth and development in the LDCs, leading to their graduation from that category, which is the ultimate goal of all LDC action,” said Cheick Sidi Diarra, the UN''s High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States.   “Only two countries have graduated from the group, while their ranks have swollen.” He said this had led to fundamental questions about the design and implementation of international support programmes, which the report addressed, arguing for less emphasis on trade intervention and more focus on dealing with structural weaknesses in LDCs.   Mr. Diarra''s concerns were echoed by Charles Gore, UNCTAD''s Special Coordinator on LDC issues, who said that, despite LDCs showing high levels of economic growth and seemingly greater resilience to the global recession of 2009, there were still major problems.   “Our statistics show that the rate of poverty reduction was very slow despite high rates of economic growth. You also find increasing vulnerabilities because of rising export concentration and rising dependency on commodities and there is very weak development of production capacities,” he said.   He said economic growth was led by commodity prices with low levels of saving and very little structural change.   The report assesses how well the LDC-specific support measures worked over the past decade concluding that the current set of measures do not go far enough.   “Existing international support measures have had largely symbolic rather than practical developmental effects,” said Mr. Gore, adding that aid targets have not been met and that aid remains tied to conditionalities. In addition, while many studies are carried out to assess the needs of LDCs, few concrete projects are launched to meet those needs.   Mr. Diarra also highlighted challenges that LDCs will face in future, pointing specifically to climate change.“Many LDCs are already suffering from the negative impact of climate change and therefore require an injection of new funds and new technology to deal with the impact of climate change,” he said.   Mr. Diarra said that if the changes that are lobbied for in the report are implemented, very positive results can follow. “We need to bring about a change of perceptions about the LDCs. We should not see the LDCs only as countries that receive foreign aid. We should see the formidable potential that exists in LDCs and we should tap into that potential,” he said.   Nov. 2010   New approach needed to end extreme poverty in poorest nations.   The number of people living in extreme poverty in the world’s least developed countries (LDCs) has been on the rise despite higher national incomes in some of those States, a senior United Nations official said today, calling for a review of the current development approaches.   “Even in the period between 2002 and 2007, during the so-called ‘boom of the LDCs,’ the pattern of growth followed in most countries has been neither inclusive nor sustainable,” said Petko Draganov, the Deputy Secretary-General of the UN Conference on Trade and Development (UNCTAD).   Next year’s global conference on the world’s 49 poorest countries should reconsider current approaches to helping these nations and come up with steps that can “generate faster and long-lasting development,” Mr. Draganov told a meeting of UNCTAD’s Trade and Development Board in Geneva.   He cited research contained in UNCTAD’s 2010 report on the LDCs, which was released last week and recommends that poor countries start to diversify their economies to reduce their dependence on basic agricultural and natural resource products and commodities in order to have sustainable growth.   Reliance on the export of primary commodities would continue to expose LDCs to “booms and busts” that follow the cyclical nature of commodities demand and prices, a trend that will make those countries unable to advance towards the Millennium Development Goals (MDGs), which include halving the number of people living in extreme poverty by 2015.   “The recent triple economic crises have significantly undermined the development and growth prospects” of LDCs, said Jo Elizabeth Butler. “Poverty remains massive and widespread,” she added.   According to UNCTAD assessments, some LDCs have considerable potential for increasing exports, Ms. Butler said.   A case study of Uganda has shown that the country has sustained relatively higher economic growth for a relatively longer period of time than most LDCs. One reason is a growing emphasis on non-traditional exports such as fish and horticulture, which have shown significant increases, Ms. Butler said.   Similarly, Ethiopia has a fast-growing floriculture industry that now employs more than 16,000 workers. Floriculture is expected to overtake coffee within five years as Ethiopia''s primary export, she said.   UNCTAD economist and LDC specialist Zeljka Kozul-Wright, one of the authors of the report, said that “the international environment should aid, assist, and abet LDCs rather than hinder their development prospects. The international community has not honoured its aid commitments to LDCs,” she said.
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