That we are in the midst of an economic crisis and times are turbulent and unsettling. Across Europe there are upheavals and in America we see unrest in certain critical ways such as the ground-swell "Occupy Wall Street" movement.
Joseph Stiglitz is a professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy. Copyright: Project Syndicate, 2011.
Writing in "Getting to the roots of the global crisis" in the SMH Stiglitz seeks to analyse the current crisis.
"The problem is analogous to what arose at the beginning of the 20th century, when rapid productivity growth in agriculture forced labour to move from rural areas to urban manufacturing centres. With a decline in farm income in excess of 50 per cent from 1929 to 1932, one might have anticipated massive migration. But workers were ''trapped'' in the rural sector: they didn't have the resources to move and their declining incomes so weakened aggregate demand that urban-manufacturing unemployment soared.
For America and Europe, the need for labour to move out of manufacturing is compounded by shifting comparative advantage: not only is the total number of manufacturing jobs limited globally, but a smaller share of those jobs will be local.
Globalisation has been one, but only one, of the factors contributing to the second key problem - growing inequality. Shifting income from those who would spend it to those who won't lowers aggregate demand. By the same token, soaring energy prices shifted purchasing power from the United States and Europe to oil exporters, who, recognising the volatility of energy prices, rightly saved much of this income.
The final problem contributing to weakness in global aggregate demand was emerging markets' massive build-up of foreign-exchange reserves - partly motivated by the mismanagement of the 1997-98 east Asia crisis by the International Monetary Fund and the US Treasury. Countries recognised that without reserves, they risked losing their economic sovereignty. Many said, ''Never again.'' But, while the build-up of reserves - currently about $US7.6 trillion in emerging and developing economies - protected them, money going into reserves was money not spent."
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