the role of the state and its governance in the context of a country’s economic development presentation

this is a power point presentation. I will give you some questions to focus on and please add whatever you think is suitable for the presentation. as well as I’m attaching the reading list for this topic. please Harvard referencing and add in text citations where needed. I would like it to be easier to read as it is a power point presentation. if you could please write it as sort of a presentation format it will be very helpful. here are some questions that were added to guide the readings.

Do you think the state can carve out a role for itself between the two poles of socialism and laissez-faire?

Don't use plagiarized sources. Get Your Custom Essay on

Just from $13/Page

Order Essay

– Why does ‘governance’ matter for economic development of a country?

– What are the origins of ‘good governance’ as a concept? And what are its main critiques?

– What are the commonly used indicators of good governance?

– Does progress in the above indicators guarantee more successful economic development of a country?

I should speak for around 10-15 minutes and my part is going to be the body and conclusion.

Data/PresetImageFill3-13

Data/PresetImageFill2-12

Data/PresetImageFill1-11

Data/PresetImageFill5-15

Data/PresetImageFill4-14

Data/PresetImageFill0-10

Data/bullet_gbutton_gray-16

Index/Document.iwa

Index/ViewState.iwa

Index/CalculationEngine.iwa

Index/DocumentStylesheet-3383.iwa

Index/AnnotationAuthorStorage.iwa

Index/DocumentMetadata.iwa

Index/Metadata.iwa

Metadata/Properties.plist

Metadata/DocumentIdentifier
7306C3CD-0886-48A4-9658-00A1A6DB671A

Metadata/BuildVersionHistory.plist

docx
M7.1-5683-2

preview

preview-micro

preview-web

WIDER Working Paper 2016/

The state, the market, and development

Joseph E. Stiglitz*

January 201

* University Professor, Columbia University, New York, US; for queries please contact: jes322@columbia.edu.

This paper was presented as a Keynote at the UNU-WIDER 30th Anniversary Conference on ‘Mapping the Future of
Development Economics’, held 17–19 September 2015 in Helsinki, Finland, as part of the UNU-WIDER project on
‘Development Policy and Practices—Competing Paradigms and Approaches’.

Information and requests: publications@wider.unu.edu

ISSN 1798-7237 ISBN 978-92-9256-044-

Typescript prepared by Lesley Ellen.

The United Nations University World Institute for Development Economics Research provides economic analysis and policy
advice with the aim of promoting sustainable and equitable development. The Institute began operations in 1985 in Helsinki,
Finland, as the first research and training centre of the United Nations University. Today it is a unique blend of think tank,
research institute, and UN agency—providing a range of services from policy advice to governments as well as freely available
original research.

The Institute is funded through income from an endowment fund with additional contributions to its work programme from
Denmark, Finland, Sweden, and the United Kingdom.

Katajanokanlaituri 6 B, 00160 Helsinki, Finland

The views expressed in this paper are those of the author(s), and do not necessarily reflect the views of the Institute or the
United Nations University, nor the programme/project donors.

Abstract: The state has played a major role in the most important developmental successes. This
paper discusses the advances in our understanding of the role of the state in the developmental
process over the past thirty years, and the contribution to those advances played by changes in
economics, changes in the world, and key experiences (in particular the successes in East Asia
and the failures in the countries pursuing Washington Consensus policies).

Keywords: state, Washington Consensus, industrial policies, development, inequality

Acknowledgements: This paper summarizes research on the role of the state in development
conducted over the past thirty or so years. My earlier views were especially influenced by my
work on the East Asia Miracle project (World Bank 1993; Stiglitz 1996; Stiglitz and Uy 1996);
and I am especially indebted to Marilou Uy and John Page who worked with me on that project.
My tenure as Chief Economist of the World Bank played a large role in shaping the evolution of
these views, and I am deeply indebted to my many colleagues at the World Bank, too numerous
to mention, for their insights, but I would be remiss if I did not mention Ravi Kanbur, Amar
Bhattarcharya, and Jason Furman (who was particularly helpful in working with me on Stiglitz
(1998a)). My more recent work on industrial policies and development has benefited from
discussions with Justin Lin, Dani Rodrik, Ebrahim Patel, Celestin Monga, and especially my co-
author, Bruce Greenwald. I am indebted to Karla Hoff for insights into behavioural economics
and development. I am indebted to Finn Tarp and Tony Addison for comments on an earlier
version of this paper. Research and editorial assistance from Debarati Ghosh, Poorya Kabir, and
Eamon Kircher-Allen is gratefully acknowledged.

mailto:jes322@columbia.edu

https://www.wider.unu.edu/node/7968

https://www.wider.unu.edu/node/378

1 Introduction

The past thirty years have been an exciting time for development. There have been great
successes—hundreds of millions of people moved out of poverty, led by more than a half billion
reduction of those in poverty in China. The rates of growth attained by China, India, and several
other countries have been unprecedented. We are witnessing the correction of an historical
anomaly in which China and India, with close to 40 per cent of the world’s population, had close
to half of the world’s GDP two hundred years ago; their share of GDP then fell to less than

per cent in the middle of the twentieth century, and now has again risen, to 23 per cent.

There have also been some notable failures, some widely expected, some a surprise. Communism
failed to deliver on its promises, support for economies built on those principles waned, and
countries that based their economies on those ideas either faced an economic collapse or
changed. On the other hand, the transition from communism to a market economy in the
former Soviet Union and Eastern Europe has, for the most part, not gone well.

1
In contrast, the

transition in China and Viet Nam has gone better than anyone anticipated. Africa experienced
widespread stagnation in the first quarter of a century of the post-colonial era. More recently,
there has been a race between population and poverty reduction: the percentage in poverty has
gone down, but the absolute numbers of impoverished have increased.

Globalization has been a mixed blessing. It has played an important role both in the successes of
development (e.g. in East Asia) and in its failures. Globalization—or more accurately, the way it
has been managed—is widely blamed for the increase in inequality in most countries around the
world—to the point where, in many advanced countries, such as the United States, those in the
middle have actually seen stagnation, or even a decline, in their income.

These dramatic economic events have, not surprisingly, been accompanied by a high level of
intellectual ferment. New policies for reducing poverty and spurring growth have been
introduced, including conditional cash transfers and micro-lending. In at least some areas these
policies have proven enormously successful. Some policies, such as industrial policies—the
selective government support of particular sectors or technologies—had fallen out of favour but
then came back into fashion. This also occurred with some institutions, like development banks.

In the Elusive Quest for Growth (to use William Easterly’s evocative title),
2
a large number of

panaceas to development were pursued, each bringing disappointment. The World Bank,
founded on the premise that a gap in resources accounted for the failure of development, itself
went from a focus on projects—intended to reduce that resource gap—to policies to institutions:
structural adjustment programmes were predicated on the belief that if only government
instituted the ‘right’ policies, the Washington Consensus policies discussed at greater length
below, development would follow. It did not happen. The focus then shifted to the belief that if
only developing countries adopted the right institutions, good public institutions (‘the good
governance agenda’) and good legal frameworks (‘the rule of law’), development would follow. It
was, however, not clear what were good institutions; and even if one could identify them, it was
not clear how to create them. US institutions, like its regulatory system and its central bank, were
held up as paragons—until the 2008 financial collapse showed otherwise. Even its ‘rule of law’

1
Later, we will note some of the exceptions.

2
Easterly (2001).

came to be questioned: it seemed to serve the financial sector well, but not ordinary citizens,
some of whom were thrown out of their homes, even when they did not owe any money.

The failure of each of these strategies naturally led to the view that development involved societal
transformation, including the transformation of the economy (Stiglitz 1998b, 1998c, 1998d), and it
would take a comprehensive development framework to accomplish such a societal transformation.

4
An

important contemporaneous development was the recognition that what separated developed
from developing countries was not just a gap in resources but a gap in knowledge; development
was about overcoming that gap. The World Bank began to see itself as a knowledge bank (World
Bank 1999).

New methodologies, too, have come into fashion: randomized controlled trials (RCTs) provided
insights into the choice of key design features in many programmes.

5
At the same time, other

methodologies, e.g. those associated with comparative economic systems, fell out of fashion. The
big developmental issues, of course, could not be addressed using RCTs: there simply was not a
large sample of countries making the transition from communism to a market economy; one
simply could not randomly select a subset upon which one would try the ‘treatment’ of
gradualism, and another subset upon which one would try shock therapy, a quick transition. One
had to make inferences about the relative merits looking at the natural experiments that history
offered. While RCTs might answer the relative merits of some design features of micro-credit
schemes, they did not anticipate what led to the largest collapse of a micro-credit system, in
India.

6
And it was not clear that they could have.

Development economics has often been a source of insights into how economic systems work
more generally; at the same time, development economics has benefited from what has gone on
elsewhere in the profession. This has been especially true in the last thirty years as economics has
broadened to incorporate insights from psychology, sociology, political science, and
anthropology. But, of course, development studies have long argued that one cannot understand
developing countries and development processes through a narrow economics lens; one needed
to widen the analysis to a broader perspective on the nature of the individual and the relationship
between the individual and society.

One of the major developments in economics is, for instance, behavioural economics, bringing
insights from psychology and sociology into economic analysis. Some of the clearest tests have
come from experiments conducted in developing countries.

3
See Stiglitz (2015c).

4
The move to such a framework was a central part of Jim Wolfensohn’s presidency of the World Bank. See

Wolfensohn (1999) Stiglitz (2005). Those working in the Bank were encouraged to look at development through this
more holistic perspective. See Stiglitz (2001a).

5
See, e.g. Banerjee and Duflo (2011).

6
They did, however, provide some insights into the role of social ties and obligations. See Feigenberg et al. (2010).

For a critique of the failures of standard economic models to predict what happened, see Haldar and Stiglitz (2013a,
2013b).

7
Indeed, one of the main critiques of the Washington Consensus policies was not only that they were too narrow in

their objectives, too restrictive in the set of instruments, but too limited in their vision of the development process.
Its worst practitioners seemed to believe that if countries only let markets work on their own, there would be
development.

8
Much of behavioural economics was based on an individualistic model of man, observing that the economist’s

rationality hypothesis was violated in many important ways. More recently, analyses have focused on how the

Development focuses on societal change, but such changes inevitably involve politics: rules of
the game that inhibit or promote such change. Politics and economics are intertwined. Indeed, it
has long been recognized that economic interests also affect politics. Markets do not exist in a
vacuum (a point to which I shall return later). They are shaped by the political system. We have
to think of the joint political and economic equilibrium. There can thus be multiple equilibria—a
society could be mired in an economic system that supported a political system which sustained a
dysfunctional economic system (Hoff and Stiglitz 2004).

Some economists had long held to the presumption not only that markets are efficient and
stable, but that there was a teleology in economic and societal evolution: there were underlying
forces for progress, improving the wellbeing of all citizens. As I comment below, and as is now
well recognized, the conditions under which markets are efficient and stable are highly restrictive,
and not satisfied in any economy, but especially not in developing countries. Economies can
even get caught in a ‘bad equilibrium’, for instance, in a poverty trap.

9
And there is also no

presumption that the evolution will occur in a way that improves the wellbeing of most
citizens.

If an economy is in a low-level equilibrium trap, the question is, how to move it out. It does little
good to say the government should do this or that, because the government itself is part of the
system. Change can be brought about by external factors—a change in technology or trading
opportunities. Change can be brought about too by ideas, ideas that are brought into the ‘system’
by its exposure to the outside. China’s observation of the successes of its neighbours was almost
surely an important force in moving it towards trying the experiments that eventually led to its
successful march to a market economy with Chinese characteristics. Some societies try to
encourage interactions with others (‘openness’) leading to more exposure to new ideas; some try
to create even within their own societies new ideas to challenge existing premises and
institutional arrangements.

Thus, for me, the central questions posed by development are systemic: How can we change the
organization of society (including the organization of the economy) in ways that increase its
openness to new ideas and that facilitate the change leading to increases in the wellbeing of most
citizens? And what can we, as developmental practitioners, do to promote the change in societal
organization in that direction? These are questions of the kind that used to be asked by those
engaged in the analysis of comparative economic systems. But that sub-discipline focused on
comparing socialist, communist, and market economies, and with the fall of the Iron Curtain,
interest in the sub-discipline waned. I am suggesting that key to understanding development is in
fact an analysis of comparative economic systems, with particular focus on the development

individual himself, and the lens through which he/she sees the world, is shaped by the society of which he/she is a
part. See Hoff and Stiglitz (2010, 2016) and World Bank (2015).

9
That is, under quite general conditions, there exist multiple equilibria, some of which are Pareto inferior to others.

See Newbery and Stiglitz (1984). It is interesting that many adhering to Social Darwinian ideas fail to note that the
existence of these multiple equilibria is one of Darwin’s many insights. See Hoff and Stiglitz (2001).

10
Recent political debates in the United States have argued that, under the influence of money, there has been a

series of reforms in the economic framework (e.g. financial sector liberalization, changes in corporate and labour
laws, and in tax and education policies) that have resulted in lower growth and more inequality—so much so that
the vast majority of individuals have seen incomes stagnate or decline.

context of what kind of economic system(s), institutions, and policies most promote the societal
change that leads to sustained and inclusive development.

In this paper, I analyse one aspect of comparative economic systems: the role of the state vs. the
market. I will describe the marked changes in our understandings of the nature of the roles that
have occurred over the past three decades.

12
Part of this new understanding is that the state vs.

market dichotomy oversimplifies the choices countries make in institutional design. There is far
more to the question of asking, what is the design of an economic system that is more conducive
to development and the developmental transformation.

1.1 Rethinking the role of the state in the aftermath of the fall of the Berlin Wall and
the 2008 crisis

Whereas the fall of the Berlin Wall marked the end of communism, the financial crisis of 2008–
09 seemed to mark the end of the era of market fundamentalism—the belief that unfettered
markets, on their own, were stable and efficient, and the best way to promote growth and
development. That belief had shaped official policy and discourse in the decades prior to the
crisis. In the context of development, these views were often summarized under the heading ‘the
Washington Consensus’, based on John Williamson’s brilliant summary (Williamson 1990) of the
policies that he thought described those being pushed by the IMF and the World Bank (with the
support of the US Treasury).

13
Later, that term came to embrace the policies of liberalization,

deregulation, privatization, and a monetary policy focusing on price stability—including policies
such as the elimination of capital controls that were themselves not part of Williamson’s original
description.

As chair of the Council of Economic Advisers, I had been actively engaged in policy debates
about the role of the state, though mostly in the context of the US and other advanced countries.
I argued, and the Clinton Administration broadly agreed, that there needed to be a more active
role for government than had marked the Reagan and Bush Administrations that preceded us.
We strongly opposed attempts to privatize social security; we strongly supported industrial
policies. At the same time, there were many battles within the Administration. The Treasury
advocated capital market liberalization—indeed trying to force developing countries to liberalize
their capital markets; it advocated the deregulation of America’s financial market. While I was
chair of the Council, we managed to resist efforts at deregulation; but the Treasury did push
Korea to liberalize its capital markets (with disastrous results.)

In February 1997, when I left the position of chair of the Council of Economic Advisers to
become Chief Economist of the World Bank, I naturally turned to the question of what led to

11
More recently, I have used such an approach to ask what is the best economic system for promoting innovation.

See Stiglitz (2015a).

12
I have long been preoccupied with these issues (Stiglitz 1989, 1991a, 1993a). This paper follows my earlier work

focusing on the role of the state in development (Stiglitz 1991b, 1993b, 1997a, 1997b, 1997c, 2001b).

13
The Washington Consensus was articulated by John Williamson in a famous paper describing the set of ideas that

were then taken as the basis of good policy in Latin America. Subsequently, the term came to embrace a broader set
of policy and ideological positions, related not just to Latin America but also to development more generally. See
Williamson (2008), Stiglitz (2008a), and Serra and Stiglitz (2008), for a more extended discussion of the evolving
interpretation of the ‘Washington Consensus’.

14
The evolving views of the Administration on the role of the state are articulated in the annual Economic Reports

of the President of the United States (written by the Council of Economic Advisers). See in particular, Chapter 1 in
the 1997 report.

development. What was the right balance between markets and the state in the process of
development? What should the government do, and how should it do it?

The issues were not just abstract and theoretical. The answers to these questions shaped policies.
I was struck how in some areas, the World Bank and the IMF were pushing policies on
developing countries (such as on the design of social security) about which, within the
Administration, there was almost a consensus that they were wrong.

15
There were other areas—

like financial market liberalization—where the World Bank seemed to reflect the Treasury’s view,
without giving due weight to the arguments that, say, the Council of Economic Advisers had put
forward against such deregulation. The World Bank was one-sided. And finally, there were some
issues to which the World Bank gave short shrift, to which many within the Administration had
attached great importance—such as inequality. The World Bank had long had a focus on
poverty, but inequality was a broader subject: it concerned issues of how the fruits of society
were divided and whether everyone had opportunity to live up to his or her potential. While
everyone in the Administration paid some lip service to inequality, in fact, the Treasury typically
resisted policies that would reduce it, and pushed policies (like preferential treatment for capital
gains) that increased it. By contrast, the Council of Economic Advisers and the Department of
Labor (headed by Robert Reich) put equality at the centre of much of their efforts. Again, it
seemed as if the World Bank reflected too narrowly the Treasury’s view. Clearly, the position of
the World Bank reflected more the views of the financial community and the US Treasury, than
the broader views even within the United States, let alone within the world as a whole.

Just a year after arriving at the World Bank, I used my delivering of the WIDER Annual Lecture
(AL) to launch a broadside critique of the Washington Consensus—contending that economic
policy ought to have broader objectives and employ more instruments (Stiglitz 1998a). I argued
that there was more to growth than just an increase in GDP;

16
that successful development

entails sustainable, equitable, and democratic development; that the development had to be
sustainable environmentally, socially, politically, and of course economically; and that such
sustainable development necessarily involved a societal transformation. I argued for a more
balanced approach between the state and the market than was reflected in the Washington
Consensus, which centred on minimizing the role of government, with government
interventions centred on price mechanisms. I argued that the government had many more
instruments at its disposal—and it should make use of these additional instruments.

My views at the time were greatly influenced by theoretical work over the preceding quarter of a
century identifying ‘market failures’, instances in which markets fail to ensure efficiency. While
Arrow and Debreu had shown that markets were efficient only under highly restricted
conditions—for instance, perfect competition, no externalities (including environmental
externalities), and no public goods—Bruce Greenwald and I (Greenwald and Stiglitz 1986) had
shown that markets were in general inefficient whenever information was imperfect and risk
markets incomplete—that is, always.

17
As we sometimes put it, the reason that Adam Smith’s

invisible hand was invisible was that it simply was not there. We had reversed the presumption

15
I tried to promote a debate on the subject within the World Bank, writing a paper with Peter Orszag (later to be

Director of the Office of Management and Budget in the Obama Administration) on why privatization of social
security was a bad policy. See Orszag and Stiglitz (2001).

16
I subsequently elaborated on the reasons that GDP was not a good measure of ‘success’. See Stiglitz et al. (2010).

17
Arrow and Debreu had only provided sufficient conditions for the Pareto efficiency of the market. But a large

subsequent literature established that those conditions were essentially the only conditions under which markets
were efficient.

that markets were efficient, with some limited exceptions that could be dealt with by selective
interventions, to a presumption that markets were not efficient, and that to attain efficiency one
might need far more extensive interventions.

These market failures were, if anything, far more important and pervasive in developing
countries. The presumption of the Washington Consensus was that if only government got out
of the way, markets would spontaneously arise and ‘solve’ the economy’s problems. But
countries in which there was minimal government intervention often did not seem to do well.
Many remained mired in poverty, with little prospect of development.

Shortly after delivering my WIDER AL, I delivered the Prebisch Lecture at UNCTAD, in which
I emphasized development as an economic and societal transformation. My message was
straightforward: developing countries were different from developed countries. Development
was more than a matter of the accumulation of capital. And government needed to play a central
role in the transformation from a developing to a developed country.

In this paper, I want to describe the evolution over the last two decades of our understanding of
the balance between the market and state in promoting development. I have become convinced
that the role of the state is even more important than I believed at the turn of the century.
Governments have played a central role in the many successes in development—in fact, in
almost all, if not all, cases of successful development.

Yet, in both developing and developed countries, there are many instances of government
failure. We have, I believe, learned quite a bit about how to increase the likelihood that
government interventions will be successful.

These new understandings are a result both of the events of the last two decades, as well as
advances in economic research. China—not that long ago a poor country with an average per
capita income well under a dollar a day—has become the largest economy in the world in
purchasing power parity (PPP). The Eurozone—perhaps the ‘strongest’ attempt at regional
integration ever—has been beset by problems, with incomes per capita stagnating. The global
financial crisis showed both that market economies often do not function well and that
widespread beliefs of how they do function, reflected in the prevailing economic models, were
simply wrong. Global warming and climate change have made it clear that externalities—at a
global scale—could not be ignored.

Meanwhile, major advances in game theory, behavioural economics, the economics of learning
and R&D, network analyses, and financial economics have further undermined the standard
models that prevailed at the time the Washington Consensus was formulated—variants of which
continued to dominate until the Great Recession (and in some circles still do so today).
Increasingly, the competitive equilibrium model, which underlay the policy positions of the
Washington Consensus, was seen as being at best incomplete, at worst, simply wrong.

Section 2 attempts to briefly summarize some of the new understandings. Section 3 provides a
recitation of some of the major events that have played such an important role in this
‘rethinking’. Section 4 provides a short catalogue of some of the underlying theoretical
developments. I end with a few concluding remarks in Section 5.

18
That is, the assumptions on which it was based departed so far from reality that any conclusion reached by the

model provided limited insight into what was going on and no basis for policy. For instance, the competitive
equilibrium model simply could not explain ongoing changes in inequality. See, e.g. Stiglitz et al. (2015).

2 Overview of new perspectives on the role of the state

An important part of this new view involves a still further broadening of objectives and
instruments. Standard theory saw preferences, beliefs, and technology as fixed; we now see these
as changeable—and many of the interventions that can help change these have relatively few
costs.

2.1 Malleable beliefs

The 2015 World Development Report (World Bank 2015) was centred on the notion that beliefs
and preferences were malleable, that changes in these beliefs could be an important instrument
for societal change—central to the developmental transformation I described earlier—and that
there were instruments available, often at very low costs, for affecting these changes. The World
Development Report presented evidence on how even TV soap operas changed views about
gender roles and education.

2.2 Learning: endogenous technology

The 1998–99 World Development Report, Knowledge for Development (World Bank 1999),
emphasized that what separated developing from developed countries was not just a disparity in
resources, but also a gap in knowledge. The successful countries, like many of those in East Asia,
had done much to close that gap. The government played a central role, both in the acquisition
and promotion of technology and in supporting education—creating a large number of
individuals able to absorb the new knowledge and to bring it to bear in their economy.

At least since the work of Solow and Schumpeter, we have understood the pivotal role of
learning—advances in technology—in increasing standards of living. For eons before the
industrial revolution, standards of living had barely budged.

19
In this long era, Malthus seems to

have been right: the main benefit of humans’ greater brain was an increase in the size of the
sustainable population, not in their standard of living.

Then, suddenly, around 1800, they began to soar. Nothing like it had happened before. In our
book Creating a Learning Society (Stiglitz and Greenwald 2014), my colleague Bruce Greenwald and
I tried to paint a picture of the world before and after:

From Roman times, when the first data on per capita output are available, until 1800,
average human standards of living increased only imperceptibly if at all. Consumption for
the great majority of human beings consisted predominantly of food, and food was largely
limited to staples—rice, wheat, and other grains. Housing entailed barn-like living
conditions with no privacy, and climate control consisted only of necessary heat in winter.
Clothing was utilitarian and rarely involved more than single outfits with the seasonal
addition of over-clothes. Medical care was almost non-existent. Travel was rare, largely
local, difficult, and uncomfortable. Recreation was self-generated and primitive. Only a
small aristocratic minority enjoyed what we would consider today an appropriate human
standard of living—varieties of fresh food, including meat; private, well-warmed
accommodations; multiple sets of clothing for varied occasions; rudimentary personal and
medical care; and opportunities for travel and sophisticated entertainment.

19
Maddison (2005).

Beginning in 1800 and accelerating markedly after the mid-to-late nineteenth century, that
privileged standard of living began to diffuse throughout Europe, North America, and
Australia. The impact of this change is apparent even in critical contemporary
commentaries. The communist manifesto is in many ways a paean to the potential of the
newly apparent economic progress—the benefits of which had not yet been widely shared.

In the twentieth century, elite standards of living became pervasive in Europe, North
America, Australia, and many parts of Asia; a trend which continues in much of Asia
today. (Stiglitz and Greenwald 2014: 13–14)

The significance of these transformations can be seen in another way: until the beginning of the
nineteenth century, most individuals spent most of their time meeting the basic necessities of
life—food, shelter, clothing. Today, for most of those in the advanced industrial countries—and
for an increasing number in the emerging markets— satisfying these basic necessities of life takes
but a few hours of work a week. Individuals can choose how to spend the ‘extra’ time available:
to work, to earn enough to consume more (whether higher quality ‘necessities’ or luxuries) or to
enjoy more leisure. The implications for economic policy and the role of the state have not been
taken fully on board. Knowledge is different from ordinary goods; it is a public good (or at least
a quasi-public good), which on its own will be undersupplied. We learn from others, and the
learning process is pervaded with externalities. Thus, if learning is at the core of development
and increases in standards of living, then there must be an important role for government.

2.3 Learning, the wealth of nations, and development

If one wants to identify the source of the wealth of nations—and what developing countries can
do to increase their standards of living—one should begin by asking, ‘what happened around
1800 that led to this dramatic change?’.

What led to these dramatic changes was the Enlightenment, the change in mindsets that was
occurring in Scotland and a few other places in Europe in the latter part of the eighteenth
century.

20
It was precisely this change in mindset that I had argued in my Prebisch Lecture was at

the centre of the developmental transformation.

There were, at least for our purposes, two central doctrines of the Enlightenment: the first was
the belief that change was possible, and the second was the belief that through rational and
scientific enquiry we can learn, and what we learn can be used to improve wellbeing.

In the years before the Enlightenment, productivity consisted of mastering the skills of one’s
craft—and that is where specialization, which Smith emphasized so much, came in.
Specialization allowed one to be better at whatever the task was to which one was assigned.
Innovation was not yet part of Smith’s mindset. It was not that today’s pin-makers would make
discoveries that they would then pass on to the next generation of pin-makers, in a never-ending
quest to increase productivity in pin-making.

20
Of course, the thread of history is never-ending: we need to ask, in turn, what led to the Enlightenment. But,

fortunately, going forward, in our quest for understanding what leads to the wealth of nations, we don’t really need
to answer that question. Other countries can see the success of the countries that have adopted the Enlightenment
mindset. What is important is not so much how those in the eighteenth century came to adopt this mindset, but
how those in the twenty-first century can extend and preserve it. The Enlightenment has constantly been under
attack, even from its onset.

At the centre, then, of development and the increase in the wealth of nations is mastery of the
art of learning—of organizing firms and society more generally in ways that promote learning.
What gives rise to the wealth of nations is not an abundance of gold, or an increase in finance,
but an enhancement in society’s learning capacities and the embodiment of that learning in
capital goods and in institutions.

Learning occurs, of course, in schools; but it occurs on the job and throughout life. It occurs as
part of explicit efforts at research; but it also occurs as a by-product of any activity we engage in.
We learn as we produce, as we invest; and in the process of learning, we learn how to learn.
Consciously thinking about production processes leads to improvement in production;
consciously thinking about learning processes leads to improvements in the learning processes.

For developing countries, there is an immediate implication: if they do not produce industrial
goods, they will not learn how to produce those goods. Had South Korea not engaged in some
forms of protection in the aftermath of the Korean War, its production patterns would have
been determined by its comparative advantage at that time—agriculture. It would have remained
a rice-growing country, and little of the learning that occurred in the process of industrialization
would have occurred. But South Korea realized that remaining a rice-growing economy was not
the road to development. Its trade and industrial policies—strong governmental interventions—
created the successful modern South Korea.

In my recent book with Greenwald (Stiglitz and Greenwald 2014), we described the learning
processes and policies that would promote learning. And because of the special properties of
learning and knowledge, the insights that had been gleaned over two hundred years about the
production of goods and services, like steel and pins, was of limited relevance. As I noted, there
was a presumption of market inefficiency, in contrast to the long-standing presumption in favour
of the efficiency of markets in the production of goods. Promoting learning, in this broad sense,
is thus one of the central roles of any government, and especially one that is concerned with
promoting development.

It is not perhaps a surprise that Adam Smith had little to say about these matters. Adam Smith
lived and wrote at the cusp of the dramatic changes I described earlier. He himself played an
important role in the Scottish Enlightenment.

21
It would have been virtually impossible for him

to fully grasp the revolution that was about to occur—to realize what it would mean for the
generations that were to follow. Yet, ironically, the market fundamentalist ideas that so
influenced the Washington Consensus policies were shaped by Adam Smith more than by
anyone else.

2.4 An overly simplistic dichotomy

While much earlier discussion focused on the role of the state vs. the market—what activities
should be undertaken by the state and which by the market—by the time I delivered the WIDER
AL, I had realized that that formulation was wrong. Markets and the state could be
complementary, both engaged in the same sector, but with different roles.

But the dichotomy between the state and the market is overly simplistic in a second way. There
are a host of institutional arrangements, and successful economies demonstrate institutional
creativity. Thus, among the most successful American institutions are its not-for-profit
universities. They are neither state institutions nor private, profit-making institutions. Some of

21
See for example Phillipson (2010).

China’s success at a critical stage in its development was due to its township and village
enterprises (TVEs), which were largely public (but local) institutions that competed vigorously
against each other.

The excessive focus on the market/state dichotomy has been counterproductive, by
undermining the search for alternative institutional arrangements. Ironically, some of the biggest
successes in development have occurred precisely in this domain. Micro-credit has provided
access to credit to tens of millions of poor, bringing substantial increases in income, empowering
women. And yet, it was a ‘revolution’ brought about neither by government nor by the private
sector. And when the private sector tried to ‘appropriate’ this institutional innovation, it turned
out to be problematic—as Muhammad Yunus himself had anticipated.

2.5 Markets do not exist in a vacuum

One of the reasons that the market fundamentalist mantra—‘leave it to the market’—is
misguided is that markets do not exist in a vacuum. They are always shaped by rules and
regulations that affect not only how they function but also who reaps the rewards. Different
rules and regulations can, for instance, result in more or less competition, open or hidden
government subsidies, and more or less transparency.

23
In the crisis of 2008, it became vividly

clear how rules and regulations had enabled some in the financial industry to win rewards for
themselves at the expense of others, and in ways that were detrimental to the functioning of
society.

As advanced countries around the world, and especially the United States, ponder how a
majority of their citizens’ incomes have stagnated for a third of a century—in spite of the
advances in technology and the alleged benefits of globalization—it has become increasingly
clear that it was largely because of the way the rules were rewritten. There was growth, but
virtually all of the growth went to the top; and because of the way the rules of the game were
rewritten, beginning around 1980, even the increase in GDP slowed relative to what it had been
in the decades after Second World War, when there was more regulation and higher tax rates—
both of which (according to the neo-liberal theories) should have slowed growth.

That is why a major agenda today is rewriting the rules again—in ways that promote faster and
more equitable growth. Details matter: details concerning disclosure requirements, the structure of
taxes, corporate governance, unions, competition, bankruptcy, the functioning of the judiciary,
and the rules governing central banks.

24
These details shape the economy, and determine

whether there will be growth and development, and if there is, where it will be equitable and
sustainable.

2.6 The importance of inequality

At the time I gave my WIDER AL, my concern about inequality was predicated on notions of
social justice. I largely adhered to the prevailing view of the time, reflected in Arthur Okun’s
classic book Equality and Efficiency: The Big Tradeoff (Okun 1975), that one could only get more
equality by a sacrifice in economic growth and performance. I say largely, because it was clear

22
See Haldar and Stiglitz (2013a, 2013b). I had set out the basic economics of micro-lending in Stiglitz (1990). See

Yunus (2011).

23
See Stiglitz et al. (2015) and the references cited there.

24
See Stiglitz et al. (2015).

that not providing education to those not able to provide it for themselves would undermine
economic performance (Stiglitz 1998e).

One of the ways, however, that our understanding of growth and development has changed is
that we now see equality, growth, and stability as complements. There are multiple channels
through which inequality harms growth and stability. As I emphasized in my book, The Price of
Inequality (Stiglitz 2012a), societies pay a high price for excessive inequality, especially when it is
generated either by rent seeking or by the intergenerational transmission of privileges. The IMF
has documented the effects of inequality on economic performance.

2.7 Inequality and market failures

If, as the previous paragraphs argued, inequality affects societal economic performance, there is a
new reason for government intervention. The standard market failures approach, dating back to
the work of Arrow and Debreu, identified circumstances in which markets failed to produce
(Pareto) efficient outcomes. But no one ever suggested that markets on their own would deliver
equitable outcomes. There was thus a rationale for government interventions—to achieve a
desirable, or at least a socially acceptable, distribution of income. The presumption was, as I
noted, that such interventions would be costly, but the costs could be reduced by carefully
designing redistributive policies.

If there is feedback between distribution and economic performance, markets will not take that
into account. This is an example of a macroeconomic externality, the study of which has become
central to modern macroeconomics.

27
It provides a further rationale for government

intervention—creating a more equitable economy can be viewed not only as an end in itself, but
also as a means to an end, higher and more stable growth.

So too, policies like capital market liberalization, which expose countries to more instability, have
large costs to society, not just in the suffering which major downturns generate: they increase
inequality, and the inequality in turn reduces economic growth (Stiglitz 2012b).

2.8 Improving the public sector

Governments and public institutions can learn to perform their tasks better, just as private firms
can. One of the failings of the Washington Consensus was that, by seeking to limit its role and
the scope of the state’s activity, it undermined the state, thus weakening its ability to learn how to
perform its critical functions.

The public good is a public good, in the technical Samuelsonian sense (Samuelson 1954): that is,
all of society benefits from ensuring that the government performs well. A central insight of
modern economics is that there will be an under-provision of public goods, implying that there
will be insufficient efforts to ensure that governments do what they should and do not do what
they should not.

25
Dabla-Norris et al. (2015) and Ostry et al. (2014).

26
Thus, there developed a large literature describing how this could be done, under various assumptions concerning

the instruments that were available to the government. See, e.g. Atkinson and Stiglitz (1980, reissued 2015).

27
These macroeconomic externalities are simply the macroeconomic manifestation of the more general market

failure identified earlier by Greenwald and Stiglitz (1986), as the work of Korinek (2012) and Jeanne and Korinek
(2013) makes clear.

Successful societies have found institutions that at least partially ‘solve’ this public good problem:
think-tanks focusing on public policy, an active media scrutinizing what the government does
and disseminating information, legal frameworks enshrining the public’s right to know

28
and

holding public officials accountable, and an engaged civil society pushing for the public interest.
These institutions need to be nurtured, sometimes with public financial support. They provide an
important set of checks against public abuses.

2.9 New understandings of ‘checks and balances’ and the rule of law

The notion that governments perform best when there are good systems of checks and balances
and a strong rule of law has long been recognized. But our understandings have changed in
recent years in several fundamental ways. Firstly, poorly designed systems of checks and balances
can lead to gridlock, preventing societal change, and even adaptations necessary to changing
circumstances. In any society, there are conflicts of interests; certain changes benefit some, while
others may be worse off. Gridlock itself is a policy—one that benefits current elites. Thus, an
important part of political institutional design is creating arrangements that do not give excessive
weight to the status quo—the reality is that in most countries, the status quo gives undue power
to elites.

Secondly, the belief that ‘democracy’—defined as an elected government subject to a rule of
law—will provide an effective check against abuses has been discredited, even in advanced
countries with relatively well-educated electorates. Money inevitably influences politics, whatever
the rules of the game; thus, societies with high levels of economic inequality will wind up with
high levels of political inequality. And these in turn will translate into economic and political
rules of the game that favour existing elites, preserving and strengthening their economic and
political power. We repeatedly see so-called democracies where policies deviate significantly from
outcomes predicted by the median voter model, where parliaments and presidents supported by
a minority of voters remain in power for extended periods of time. Again, the design of
institutional arrangements is critical: the rules governing campaign contributions, voting, etc.
have major impacts on the relationship between economic and political power.

What is needed is more than checks and balances within government, but within society—and that can only be
achieved if the extent of economic inequality is limited, and if there is a break in the transmission of economic
advantage across generations.

Thirdly, we have come to understand the ambiguity in the term ‘rule of law’. The feudal system
had a rule of law. Most abusive regimes (like Nazi Germany) have legal systems to which they are
constantly making reference. What matters is what kind of ‘rule of law’. What most mean by a
rule of law is a legal system that protects ordinary citizens against the powerful. But the 2008
crisis raised questions about whether even America had a rule of law in this sense: few of the
powerful bankers who had brought the global economy to the brink of ruin and whose firms had
engaged in massively bad behaviour, including fraud and perjury—lying to the court that they
had examined the records of the borrowers in default and that they did indeed owe the money
claimed—were never held accountable.

28
See Florini (2007).

29
Research in political science has shown that these effects can be complex and subtle, with, for instance, general

equilibrium and signalling effects being as important in political equilibrium as they are in economic equilibrium. It
is worth noting that on numerous occasions in recent years, electoral outcomes have been at odds with campaign
spending. Campaign contributions matter, but they are not the only thing that matters.

2.10 Sustainable, democratic, equitable development and our metrics

A major thesis of my 1998 AL was that governments should pursue not just an increase in GDP,
but also sustainable increases in living standards, equitably shared, through democratic processes.
At the time, I did not give much attention to measurement of success.

The last two decades have been marked by an increased focus on metrics. Donors rightly want
to know that their money is being well spent. But unfortunately, most of the metrics that have
been the focus of attention are weak intermediary variables, only loosely linked to the issues of
ultimate concern. The successes of educational reforms are likely not to be felt for years, so that
looking at completion rates says nothing about the quality of education.

There has been a considerable amount of research attempting to identify better links between
intermediary variables and overall economic performance. But how do we assess overall
economic performance?

I chaired the international Commission on the Measurement of Economic Performance and
Social Progress, which identified the many ways in which GDP is deficient, and suggested
improvements.

31
Standard measures of income and GDP were, for instance, often not closely

linked with individuals’ sense of wellbeing. The 2008 crisis highlighted that existing measures did
not reflect economic sustainability—let alone social, political, or environmental sustainability.
Growing inequality in most countries around the world meant that GDP per capita could go up
even as most individuals were worse off.

Today, there is a global movement engaged in developing better metrics that better represent the
interests of citizens and better reflect their values and sense of wellbeing. There is a broad
consensus around several propositions: (a) what we measure affects what we do and the design
of policy: metrics are important; our current metrics, for instance, do not fully capture the loss of
wealth (human capital) associated with severe economic downturns, such as that which followed
the global financial crisis, and therefore, there has been less effort at ensuring a quick and full
recovery than there should have been (Stiglitz 2015d); (b) no single number can capture
something as complex as our society; (c) accordingly, there will have to be a dashboard of
indicators; (d) the dashboard which is appropriate for one country may be different from that of
another; (e) but among the metrics that should be included are those that reflect distribution and
environmental sustainability; (f) there need to be improvements in the way we measure the value
of government and other services; and (g) median income adjusted for inflation almost certainly
is a better measure of what is happening to the typical individual than GDP per capita, and
therefore it should be among the numbers in the dashboard.

3 Major events and the lessons they provide

Over the past quarter of a century, the world has offered a plethora of experiences from which
we can draw inferences about what contributes to wealth creation and successful development.

30
Though when I had been chairman of the Council of Economic Advisers, I engaged in a more modest push to

ensure that our metrics better reflected resource depletion and environmental degradation.

31
For a summary of the Commission’s report, see Stiglitz et al. (2010).

The discussion in the following sections, the first setting out the successes of East Asia and what
the role of the state was in that success, and the rest the failures elsewhere, highlights some of
what has contributed to learning or mis-learning.

Sometimes we come to believe things that are not true. The scientific approach of the
Enlightenment should have provided some guidance, some help in avoiding such a trap. But the
economy is highly complex, and has been evolving fast. It is not easy to resolve disputes: there
are no controlled experiments. But there should be no doubt—there have been massive
misunderstandings about how the economy functions, highlighted both by the success of East
Asia (which much of the standard wisdom said should not have occurred) and the 2008 crisis
itself (which, again, the standard wisdom said should not have occurred). Most importantly,
given beliefs about how man and society are fundamentally and deeply value ridden, it is not a
surprise that debates about the economy became highly charged.

3.1 The East Asian miracle

In retelling the story of East Asia’s success, and the other failures, I have a single focus:
extracting lessons for the nature and sources of wealth creation, defined broadly to mean the
increased ability to have sustained increases in standards of living, and in the role of the state in
promoting development and wealth creation. Most of the countries of East Asia have few
resources beyond the enormous potential of their people. When they began their journey of
development, a little less than half a century ago, they were very poor. Gunnar Myrdal, the
Swedish Nobel laureate, wrote Asian Drama in 1968 (Myrdal 1968), in which he predicted that
the countries in the region would remain mired in the poverty in which they had lived for
centuries. Most lived a subsistence life, and Myrdal held that their values and beliefs were to
blame. ‘The general conclusion we shall reach is that the differences in initial conditions between
the South Asian countries and the developed Western countries are extremely significant and
that they regularly work to the disadvantage of the underdeveloped countries in South Asia,’ he
wrote. ‘Furthermore, the differences are in many instances of such a nature as to prohibit a
pattern of growth analogous to that experienced by the developed Western countries.’ (Myrdal
1968: 673–74).

What has happened in the last forty years is almost unbelievable, and I was fortunate enough to
be able to observe much of it first hand, from my first visit to Asia in 1967, to my first
engagement with Chinese economists as they forged a strategy for development in 1980, and my
first visit to China in 1981, to my intense study of the ‘East Asia Miracle’ in the late 1980s and
early 1990s,

32
to my deep engagement with China during my tenure as Chief Economist of the

World Bank (1997–2000), to my on-going involvement, including annual meetings of the China
Development Forum.

The Chinese miracle

China, for instance, grew at an average rate of almost 10 per cent for more than thirty years after
it began its march to a ‘social market economy with Chinese characteristics’ in the late 1970s. No
one had thought such rates conceivable. The highest rate that had been achieved on a sustained

32
Leading to the 1993 World Bank Study, The East Asian Miracle. I continued my close engagement with China as

Chairman of the Council of Economic Advisers under President Clinton, as Chief Economist of the World Bank,
and in the subsequent years.

33
Sponsored by the Development Research Council of the State Council, which has provided an opportunity for

regular engagements with the premier and other senior economic officials.

basis before that was perhaps Brazil, with its 5.7 per cent growth rate over the three-quarters of a
century before the Washington Consensus ‘reforms’ that, unfortunately, rather than leading to a
restoration of growth, had just the opposite effect. Even in its decade of fastest growth, the US
had only grown at around 4.5 per cent a year and Europe little better.

In terms of the wellbeing of mankind, perhaps no event is comparable to this: the movement of
more than a half billion Chinese out of poverty in the span of a third of a century.

China went from being a country with a GDP a fraction of that of the United States to being the
world’s largest economy in terms of PPP (purchasing power parity), a status attained in 2014 (a
remarkably unheralded event). No measure is perfect. Still, the PPP provides perhaps the best
way of comparing the size of different economies. Even at exchange rates, China is the second
largest economy.

China already was, of course, number one in trade of goods (it surpassed the United States in
2013), and in manufacturing (surpassing the United States in 2011, and by 2013 [latest complete
data], China’s manufacturing was 122 per cent of the United States’). Chinese savings, no matter
how measured, far exceed those of the United States, and have done so since 2009 (gross
domestic savings for China were US$4.8 trillion in 2013—50 per cent of GDP—whereas the
United States’ were US$2.7 trillion—18 per cent of GDP).

35
The Chinese savings rate has

exceeded America’s for decades.

The fact that China’s economy eventually exceeded the size of the US economy did not come as
a surprise: in the last thirty-five years, China’s GDP had an average annual growth rate more
than 7 percentage points higher than that of the US—and as many as 12 percentage points in
2009.

36
It simply happened a little sooner than expected.

Of course, there is still a huge gap in GDP per capita. China has five times the population, so that
even with the same GDP, GDP per capita is one-fifth that of the United States. So China has a
long way to grow. China is still a developing country. Moreover, in some arenas, PPP may not be
as relevant a yardstick as GDP at official exchange rates.

Many in China have been worried about falling into what has been called the middle-income
trap. Some countries have been able to significantly increase their wealth and wellbeing for a long
while—moving up from being very poor (as China was at the beginning of its transition to a
market economy) to being moderately well off. But then, it appears that closing the gap with the
more advanced countries is increasingly out of reach. They get ‘trapped’—remaining as middle-
income countries. While there is some controversy over whether there really is such a thing as
the middle-income trap, moving up the ladder is always difficult, and the statistical evidence that
there is a discontinuity in the likelihood of making it to the next rung as one reaches the middle is
at best weak.

China can easily avoid any trap that might exist, but it will require more active government
policies, not only to promote stable and sustainable growth and economic restructuring, but also
to address the central problems the country faces. These include addressing environmental

34
It is worth noting that the decade of greatest success was 1962–1973, well before tax rates were reduced and the

era of deregulation and liberalization began. Data source: World Bank.

35
World Bank data.

36
World Bank data.

degradation, and underinvestment in health, education, and cities, including ensuring that the
cities are liveable, with adequate parks and public transportation. And success in this will require
strengthening of governance in both the public and private sectors. In a sense, it will require not
forgetting the lessons about what led to its success in the first thirty years of its transition to a
market economy as it goes on to the next thirty years, and instead adapting them to the new
context China has created for itself.

There is another trap, besides the middle-income trap, and this trap, I believe, is real. It might be
called the high-income or American trap, where, as GDP grows, so too does inequality, so much
so that large parts of society see their incomes stagnate. This, I suggest, is also avoidable, but
only if the government actively pursues an inclusive growth strategy. Such a strategy is more
likely to produce stronger and more sustainable growth, as our earlier discussion suggested.

Was East Asia’s success a ‘miracle’?

The successes of East Asia were called a miracle, but not because they defied the laws of
economics. As I will explain, what they accomplished was not a miracle in that sense; it was a
miracle because nothing like it had ever happened before, and so it was simply assumed that
such growth rates were not possible. And it was especially a miracle because the countries of
East Asia defied the precepts of ‘good policy’ that had been enunciated by the wise men of the
West, reflected in the Washington Consensus. These called for a small state, focused simply on
ensuring that there was macroeconomic stability—and by macro-stability, they meant price
stability. They argued against government activism—from promoting industry to intervening in
trade. Indeed, they argued for trade liberalization (stripping away all barriers to trade),
deregulation (stripping away other constraints to private markets), and privatization (turning over
all enterprises to the private sector). They paid no attention to inequality or to social cohesion,
and because success depended on having a small government, public governance (for instance,
the efficiency and transparency of public administration) was not of much concern. And because
it was presumed that markets would be efficient, they paid no attention to corporate governance,
the rules governing the private sector.

The essential mistake made by the IMF and the World Bank and the Washington Consensus
policies that they pushed was assuming that growth was about the accumulation of capital and
the improvement in the static allocation of resources. In that world, there is a one-time gain from
eliminating distortions; but beyond that, the maximum potential growth rate was really limited by
the rate of accumulation of capital. East Asia excelled in this—beyond anything that had

37 If China is to maintain its success, it will have to learn to manage its financial market. China may have hoped that
in creating a market economy with Chinese characteristics it might avoid the volatility which has marked other
market economies. But there are deep-seated reasons for this volatility, and only strong regulations and built-in
stabilizers can limit their frequency and depth, and only strong systems of social protection can limit their economic
and social consequences. The United States, for instance, went for a third of a century without a financial crisis, but
once it started deregulating the financial sector, they returned, with greater frequency and depth. Many in and out of
China had been encouraging China to follow the American model and deregulate; others, to learn the lesson of the
2008 crisis and proceed very cautiously. The recent volatility in China seems consistent with the view that it
unleashed the financial sector too fast, without a full understanding of how to bring it under control.

China’s policy discourse has recently been focused on placing the market at the centre. I believe that if China is to
sustain its growth, it will have to have a more subtle strategy—one which cedes to the market what should be the
market’s responsibility, but in which government may actually take a more active role in certain key areas going
forward, including protecting the environment, promoting innovation, and curtailing inequality.

happened in the past. China’s savings rate, for instance, even reached 50 per cent. This was
important, but it was not the key: The essential insight of the countries in East Asia was the
importance of learning (Greenwald and Stiglitz 2014a). More important than closing the gap in
resources that separated them from the developed countries was closing the knowledge gap
(World Bank 1999). Theory presented no limit to how fast that could be closed—and therefore
on how fast these countries might grow.

The origins of the East Asian miracle

Japan had led the way for the East Asia Miracle: in the years after the Meiji restoration, after
Commodore Matthew C. Perry forced Japan to open trade with the United States in 1853, it had
worked hard to understand what had led to the growth of those in Europe with considerable
success. But the transition to a modern economy was not easy, and the decades before Second
World War were marked by high levels of labour strife, so inconsistent with the image that Japan
presented to the rest of the world after Second World War, where many talked about ‘Japan,
Inc’.

Japan’s success in turn set the pattern for the other countries in the region, which carefully
studied what it had done. There was institutional learning: they learned from Japan’s success.

The other countries around East Asia had also had impressive growth rates, not quite as high as
that of China’s in the last three decades, but still unprecedented. Take Korea. At mid-century, a
majority of the country was illiterate. Its per capita income increased by almost fivefold over the
last thirty-five years;

38
today, a higher proportion of Koreans than Americans attend college

39
and

in standard proficiency tests of high school students, it outperforms the US.
40

The rich variety within East Asia

The countries of East Asia varied greatly in their economic policies. Some, like Korea and Japan,
did not open up their doors to foreign investment (alleged by the advocates as the key factor to
success for developing countries and emerging markets). Others, like Malaysia, did. China
insisted on foreign investors being part of joint ventures. Some, like Taiwan, focused on smaller
enterprises; others, like Korea, on large conglomerates.

‘Culture’ is often given credit for their success. As I travelled around the region in the late 1980s
and early 1990s studying their development, one of the things that struck me was the extent to
which most agreed about the importance of culture: those with a Confucian tradition attributed
their success to their Confucian traditions, with its emphasis on order and authority; those
without a Confucian tradition attributed their success to the fact that they were not stifled by the
Confucian emphasis on authority.

What they had in common, though, and what they all perhaps learned from each other, was an
emphasis on learning, on how to close the knowledge gap, for instance through education and
the transfer of technology.

38
World Bank data.

39
OECD (2015).

40
Data from the Programme for International Student Assessment of the OECD.

Shared prosperity

Most of the countries of East Asia also had strongly equalitarian policies that promoted social
cohesion and led to inclusive growth, and opened up the doors to large fractions of the
population, including women. In doing so, they harnessed the most valuable resource they had—
their human resources.

As a point of comparison, even today, Japan’s Gini coefficient is .32, compared to the US, which
exceeds .41. Even China, which has a Gini coefficient comparable to that of the United States,
had policies to ensure that the fruits of the growth were shared by those at the bottom and the
middle.

I sometimes tease my Chinese colleagues, pointing out that they had achieved their high level of
inequality in just three decades, when it had taken the US much longer to achieve its outsized
level of inequality. But there is a difference: as Kuznets pointed out,

42
in the early stages of

development it is natural for there to be an increase in inequality, as those most adept in taking
advantage of the new opportunities benefit. In China, the Eastern provinces pulled ahead of the
rest. There is always a large urban rural divide, and so, initially, as more people moved to the
urban sector, the standard measures of inequality increased.

But there is a fundamental difference between China’s inequality and that in the US. Even if
some were doing better than others, almost everyone was seeing their incomes increase. The
Chinese middle class has expanded dramatically since the turn of the century. In 2000, just 4 per
cent of the population earned between US$9,000 and US$34,000. By 2012, 68 per cent of the
population had incomes in that range (Barton et al. 2013). In contrast, American incomes, except
for those at the top, have stagnated for decades.

This kind of shared prosperity did not just happen. There were at least two critical ingredients.
The first was the careful management of macroeconomic policies in conjunction with ‘reforms’.
These reforms, like trade liberalization, in some instances led to the destruction of jobs. But job
destruction was always balanced by job creation. Ideologues in the West assumed that that would
happen—that the natural state of a market economy was full employment, because that was what
was assumed in their models. But that is simply false. In many, perhaps most countries around
the world engaging in such reforms, job destruction has outpaced job creation, and that
weakened the economy. Moving workers from low-productivity, old and inefficient sectors to
more dynamic ‘reformed’ sectors would have increased growth and productivity. But moving
them into unemployment lowers both. Further, the economy is also hurt in the long run:
workers learn on the job. They acquire skills. But when workers are unemployed, not only do they
not learn, but existing skills atrophy. Even the most basic ‘skill’—the work habits associated with
getting to work on time on a regular basis—can erode. Thus, a long episode of high
unemployment hurts growth and productivity. There is hysteresis: history matters.

The second was the heavy investment in human capital, in education. Basic literacy became
universal. Secondary education became the norm. China sent hundreds of thousands of students
abroad. Millions more were enrolled in their own universities.

41
Based on World Bank data. It is worth observing that different datasets (e.g. the OECD) provide somewhat

different numbers. Still, the general picture is similar.

42
Kuznets (1955).

The real test for China will come in the future: Will it be able to bring down inequality, as it
moves into the next stage of development? Will it conform to Kuznets law, which suggested that
inequality would eventually be reduced? Or will it follow the American model, in which, after a
short episode of reduced inequality, inequality started to soar?

In China there is already an awareness of the issue of inequality, and a commitment at the
highest level to do something about it. The last few years have, in fact, seen a decline in the Gini
coefficient. This is perhaps largely due to the government’s long-standing efforts to reduce
regional gaps, including its huge investments in infrastructure, ports and airports, highways and
high-speed trains, which have brought those in the interior regions that had grown more slowly
closer to the coast. The government is also committed to providing access to credit to those
wishing to start new enterprises. It has also made large investments in rural health and
education—after an initial period in which these were cut back.

I do have a concern: the same ideological stances that have led to the high levels of inequality in
the US are spreading in China, with the support of some of the same kinds of vested interests. If
that happens, China could well fall into what I referred to earlier as the high-income or American
trap.

The role of the state in the East Asian miracle

In all of the countries of East Asia, the state played a central role (a role that has subsequently
been referred to as the development state) and it was this central role that reflected most deeply the
departure from the dictums of the Washington Consensus. At the same time, markets were also
important. The state governed the market. It did more than just enforce contracts. However, it
played not just a regulatory role, but also a catalytic role.

The East Asian countries came to an understanding of these roles in a pragmatic way. They did
not arrive at their views through an analysis of economic models, but I was always struck in my
conversations with the economic leaders of the time, those who had shaped the policies of the
Miracle, by how closely their insights corresponded to those thrown up by the models that I had
been working on. Those models emphasized the limitations of the market, the imperfections, for
instance, of capital markets, the underinvestment that would occur in technology and education,
and the importance of equality for maintaining social cohesion and trust. They recognized that
private financial markets would provide insufficient funds for long-term investments, and thus
they provided money for long-term investments. But they did so at reasonable commercial
terms; they focused on correcting a market failure, not making massive transfers from the public
to the private sector.

They came to their views in part by seeing the successes and failures elsewhere. Markets on their
own did not bring rapid growth, but neither did the Soviet model. It had managed to generate
high savings rates, but those savings often were not well-invested. In Japan, particularly,
Marxists’ ideas about exploitation had great influence. They searched, and found, a hybrid—
more state than the West, more ‘markets’ than the Soviet Union.

China had approached matters from the other side: it had had the bitter experience of
imperialism, but had also seen the failures of Maoism in the first quarter of a century after its
Revolution. It also saw the successes of its neighbours, and grasped that there was no reason that
it could not do just as well. Most of its neighbours had achieved growth with equity. Doing
something similar in the vast country of China was, however, a Herculean task, an order of
magnitude more difficult. China could not simply borrow a growth strategy, wholesale, from any
of its neighbours.

It had two further problems: it was in fact much poorer than some of its neighbours, even at the
time that they had embarked on their growth policies. It had few natural resources (in contrast
to, say, Malaysia), and it had a vast population which had to be fed, clothed, and housed, and for
whom jobs had to be found. And it had to make the transition to some form of a market
economy.

In 1980, at the very beginning of China’s move to a market economy, China met with a small
group of American economists to discuss its strategy and to get our views. I remember vividly
the meeting in December in Wingspread, Wisconsin.

China wanted to move towards a social market economy with Chinese characteristics. No one
knew what that meant, or how it might best be done. What were the essential features of a
market economy? Were those features compatible with China’s commitment to maintain a
higher level of social equality with less exploitation than what markets had produced in the
United States and other Western economies?

One of the other economists at the meeting was Ken Arrow, who had earlier established the
conditions under which markets were efficient. He realized that those conditions were very
restrictive. As a result, he had less faith in the market economy than some of those in the
Chicago tradition. There were, of course, many features of the market economy, most notably
private property and competition. And for a market economy to work well, one had to have a
good legal framework, a good set of regulations. Ideally, one would like to do everything at one
time. But that was not possible.

Thus, the question was one of priorities: what should be emphasized. Arrow and I argued that
competition was key.

43
For a system of private property to work well would require an

institutional and legal infrastructure that would take time to construct. The experience of China
suggests that we were right. And as I noted earlier, its pragmatic solutions defied the
recommendation and precepts of the time.

For instance, rather than privatizing land, as the Washington Consensus would have
recommended, it established the individual responsibility system, giving individuals effective
control over their land, but without the right to buy and sell it. It thus avoided having to address
the hardest political issues, but got 99 per cent of the benefits that would have resulted from
privatization. It even avoided in the short run some of the worst adverse economic effects that
might have ensued from privatization—a focus on speculation and a growth in inequality.

The way in which it managed the transition from the controlled prices of the old regime to a
system of more market-based prices (called the dual price regime) also ran against the received
wisdom. They kept quotas (required levels of output) that farms and firms had to meet, and what
the farms and firms received continued at the old prices; but they were allowed to produce and

43
What we were arguing was, of course, consistent with a long tradition in economics. Earlier Lange and Taylor

(1948) had argued that a socialist government (with government ownership of property) could achieve just as
efficient an allocation of resources as a private market economy through the use of decentralized prices. The failure
of the communist governments (even those, like Hungary, which tried to market socialism) suggested that these
models did not capture the essence of what made for a successful economy. See also Stiglitz (1980, 1991c, 1994).

44
Incentives to maintain the quality of the land are obviously attenuated without full ownership; but if individuals

plan to farm the land for an extended period of time, this effect is minimal; and if they do not, and it is anticipated
that land will not be used for agriculture in the future, the quality of land would not have been maintained in any
case. In subsequent years, local authorities themselves became involved in land speculation, and government control
of land turned out to be a major source of corruption.

trade beyond these quotas, and here, markets determined prices. Over time, the quotas would be
reduced, and more activity occurred within the market.

45
It worked: the transition to the market

system with no quotas went smoother than anyone had expected.

The next phase of its growth, dominated by township and village enterprises (TVEs), also defied
the conventional wisdom. These were new enterprises, run by local governments. The
conventional wisdom was that government—at any level, local, provincial, or national—should
be scaled down. Everything should be turned over to the private sector. Here, the source of
growth centred on government, though at the local rather than the national level.

The TVEs created strong competition, which spurred growth and job creation. This was
particularly important: as productivity in agriculture increased, people would be moving out of
agriculture. Political and economic stability necessitated creating jobs for them elsewhere. The
TVEs did this.

Later, I will describe another set of experiments, in the countries of Eastern Europe and the
former Soviet Union, where a different set of economists had argued for rapid transition with an
emphasis on privatization. The failure of those experiments reinforced the conclusion that our
analysis had been correct.

Political economy

In political economy, the East Asian countries went beyond the more narrow economic models that
I had focused on, in developing institutional structures that seemed to mitigate the problems that
sometimes had afflicted government interventions in the market. Elsewhere, corruption had
often proven a problem. Of course, they did not solve the problem of corruption. No country
ever has.

Sometimes, countries have been misled into believing they have eliminated corruption, when all
they really had done is to change the form. In the United States, for instance, it is relatively rare
for money to be passed on from private corporations to public officials in plain brown paper
envelopes. But the US has developed a different, and in some ways more invidious form of
corruption, sometimes called corruption American style, where there is a more complicated set of
exchanges: large campaign contributions are given in exchange for the support of critical pieces
of legislation, and often a good job and very well-paid speaking engagements after one’s political
career comes to an end. Not surprisingly, the magnitude of what is exchanged surpasses in dollar
value corruption anywhere else in the planet—one piece of legislation, a simple sentence in a
drug bill limiting the US government from bargaining with the drug companies, reaped an extra
trillion dollars to the drug companies over a ten-year period.

In the middle of the East Asia crisis in 1997–98 many of Western political leaders and a few
commentators from the West blamed the crisis on the ‘crony capitalism’ that they alleged was
deep and rampant in these countries. In fact, they had been unhappy with the East Asian model
and its successes for years, because it was a challenge to their ideology. The crisis allowed them
to go on the offensive.

The irony was that the policies being pushed by the US Treasury and others reflected crony
capitalism—the nexus between politics and finance that ran deep especially in America, but also

45
The conventional wisdom had it that there would be arbitrage between the two prices, and this would undermine

the whole system.

elsewhere; a cronyism motivated by the massive campaign contributions to which I referred
earlier, but institutionalized through the system of revolving doors, where, for instance, the
Secretary of Treasury, almost as a matter of routine, came from and went back to Wall Street. As
it turned out, the crisis countries in East Asia quickly recovered, especially Korea and Malaysia,
which had resisted much of the advice of the IMF, showing that the diagnosis that deep-seated
crony capitalism had caused the crisis was wrong. If anything, it was the American version of
crony capitalism that was the cause of the crisis. At the centre of the East Asian crisis was capital
market liberalization (removing restrictions on the movement of capital in and out of the
country) and financial market deregulation (removing restrictions on the operations of foreign
financial firms within the country)—policies that had been pushed on the East Asian countries
by the American Government under the influence of America’s financial sector.

46
Finally, almost

fifteen years after the global financial crisis, the IMF realized that full capital market liberalization
might not be good for a country; it realized that its previous policy prescriptions had been
wrong, and changed its ‘institutional view’ to supporting capital controls

47
(‘capital account

management’ was the more polite term that was used). It realized too the importance of good
financial sector regulations. (Even then, the US Treasury, still dominated by Wall Street, did not
fully change its position—even with a Democratic president.)

The countries in the region had, in fact, worried about the risks of crony capitalism. Part of their
success was due to close cooperation between government and business. But there is a fine line
between cooperation and cronyism. Part of the success was that they had set up institutional
structures that acted in part as a system of checks and balances, and they reduced the incentives
for bad behaviour. For instance, while the government provided credits, they were not
subsidized. Credits were given to those firms that had succeeded abroad—there was an objective
measure of success. And they created professional bureaucracies that limited the scope for
political machinations.

49
Of course, corruption occurred—just as corruption, taking advantage of

opportunities to advance one’s own interest at the expenses of those whose interests one is
supposed to be advancing, occurs in the private sector in every economy;

50
and the greater the

money to be made by corruption, not surprisingly, in general, the greater the corruption.
51

46
For a more extensive discussion of these issues, see Stiglitz (2002a).

47
International Monetary Fund (2012).

48
While it did support some reforms (under the Dodd–Frank Bill), there were many reforms that were widely

supported by economists which it opposed; in international seminars, representatives of the US Treasury continued
to argue for capital controls; and in trade negotiations they continued to attempt to constrain foreign governments
from imposing regulations on the financial sector.

49
See Stiglitz (1996) and World Bank (1993).

50
Thus, corruption can be viewed as the violation of a ‘fiduciary’ relationship. In a sense, in any principal–agent

relationship, when the agent does not act in the interests of the principal, there is a violation of fiduciary
responsibilities. We tend not to use the term ‘corruption’ to describe these ordinary violations—indeed, enhancing
the alignment of the behaviour of agents with the interests of principals is the subject of the vast principle-agent
literature, one of the major strands in the economics of information. Rather, we reserve the term for large-scale
violations. Some focus only on those that arise in the public sector, but while largely a matter of semantics, I think
that is misguided, because it suggests an asymmetry in behaviour that is not there. (Indeed, most of the corruption in
the public sector involves a briber and a bribe, and the briber is almost invariably from the private sector. Thus, the
private sector is intimately involved in what corruption occurs, and an attack on corruption is best mounted from
both sides. See Stiglitz (2006a). The abuses of fiduciary responsibility in the financial sector in the US, by almost any
reckoning, are of a scale that the term corruption could deservedly be applied.

51
The scale of what China was attempting in its move towards a market economy was, of course, unprecedented,

providing unprecedented opportunities for corruption. Certain aspects of the way China moved to the market
economy may have worsened the problems. The lack of democratic accountability removed one important check.

East Asia vs. the US: finance and savings

Indeed, as I compare the success of the East Asian countries in creating true wealth with the
more recent experiences in the United States, one of the crucial differences relates to finance,
which in most of the countries in East Asia remained tightly controlled by the government
(rather than as in the United States, where finance sometimes almost seemingly controlled the
government). It was heavily regulated—and in some cases (such as Thailand) regulated to focus
on real productive investments, rather than real estate speculation. They avoided the short-
termism prevalent in the US, and even created special financial institutions (such as the Long-
Term Credit Bank of Japan) for longer-term investments. They focused on encouraging savings
(both by making it easy for individuals to save and making savings more secure), while US
private banks encouraged borrowing and indebtedness. The result was high savings rates—by
contrast, in the US, in the years before the crisis, the household savings rate fell to zero.

Some have seen this high savings rate as the source of East Asia’s success—it was what led to the
creation of the wealth of these nations. But I hope this extended discussion of East Asia’s
experience has made it clear that such an analysis is based on too narrow a vision. The high
savings rates may have enabled East Asia to embed some of the new learning that was going on
at a rapid pace into machinery. But much of the learning was institutional: how to organize a
modern society; how to run complex cities; and how to structure complex organizations.

There is still a large gap between the productivity of most of the countries in East Asia and other
advanced countries, though in some areas (like the production of automobiles) Japan may be
ahead of the US, and in others (like the production of steel) so may South Korea. But on
average, incomes per capita in China are still a fifth of that of the United States (in purchasing
power parity; in exchange rate terms, less than a sixth.) There is still much to learn.

Summary

This section has focused on the success of East Asia, including China. Their development and
growth was beyond anything that had been thought possible, and contrary to what others
(Myrdal) had thought would occur. They began their growth with odds seemingly against them:
most had no natural resources, and in most, education levels (human capital) were also limited.
Their success was based on government assuming a major role in the economy, but they used
markets. They did not see markets as an end in themselves, but as a means to achieve their
broader societal goals. There are major debates about what it was that the government did that
led to success, with different countries doing different things and policies changing over time.

They developed the concept of the development state, and made an impressive case that a
developmental state could do a far better job—using markets—in promoting development than
unfettered markets. The development state provided a marked contrast to the perspectives
advanced by the Washington Consensus.

The way local governments were financed, through land sales, increased opportunities for corruption—with land
being a critical scarce natural resource, China could have been more guarded against the risks of the corruption
associated with the natural resource curse. And the inadequately regulated financial sector provided large
opportunities for rent seeking, which sometimes verged into corruption.

52
For a discussion of the role of the financial sector in the East Asia miracle, see Stiglitz and Uy (1996).

3.2 The Washington Consensus and the failures of development

The same period that saw the enormous success of the East Asian countries saw stagnation and
instability in much of the rest of the developing world. These countries failed to develop and
create wealth. The reasons for their failures are as instructive as the reasons for the successes of
the countries in East Asia. I believe it is because many of them followed the precepts of the
Washington Consensus. Some did it voluntarily. But many, especially in Africa, had little choice:
they were dependent on the West for aid, and a condition for getting that aid was doing as they
were told, and they were told to follow the Washington Consensus. In Africa, structural adjustment
programmes resulted in a quarter century of stagnation, with per capita incomes in sub-Saharan
Africa lower in 2007 than they had been in 1974.

At the centre of the success of East Asia was learning, facilitated by education, the transfer of
technology, and industrialization. At the centre of failures in Africa was the process of
deindustrialization and a total absence of a concern about learning. By the beginning of the
twenty-first century, Africa was less industrialized than it had been three decades earlier.
Investment in education focused on primary schools—at best improving the ability of these
countries to produce basic commodities, but not helping them move into the twentieth century,
let alone the twenty-first. Nothing was done to really close the knowledge gap that separated
them from the more advanced countries (Noman and Stiglitz 2012a, 2012b, 2015a, 2015b;
Noman et al. 2012).

Disappointingly, even the countries that achieved macro-stability and had significant advances in
‘good governance’ did not see a flow of foreign direct investment, except in natural resources.

After the failures of the structural adjustment programmes, growth recovered in the twenty-first
century. It was partly based on increased Chinese involvement—not only buying commodities
and natural resources, but large amounts of assistance, especially in the construction of
infrastructure. Many worry that with China’s slowdown, and the concomitant decrease in
commodity prices, Africa’s growth too will slow.

But some of the biggest successes occurred in African countries with limited resources, in
countries that had learned some of the lessons of East Asia’s success. Their governments took
on the role of the developmental state, and quite consciously so. They did what any good student
of development should do: study the cases that were successful, and base their policies on
attempting to adapt to their circumstances the policies that had worked so well there.

The cases of successful development

In sub-Saharan Africa, there are now perhaps four countries that have had a modicum of
success, one with natural resources, and three without. Tiny Botswana, blessed with diamonds,
has grown at an average of more than 8.8 per cent since independence in 1966, ranking towards
the top of the league tables. Rwanda, Ethiopia, and Mauritius have grown at average rates of 7.7
per cent, 8.9 per cent, and 4.0 per cent, respectively, since 2000. Over one five-year period, 2004
to 2008, Ethiopia, one of the poorest countries in the world, had grown an average of 11.7 per
cent per year (according to World Bank data).

53
The nadir of per capita income in sub-Saharan Africa was 1994, when they were some 22 per cent below their

1974 peak (World Bank data.)

Even resource rich Botswana, however, had to do things differently from what had been done
elsewhere. Most natural resource countries have not done well. (Humphreys et al. 2007; Shaffer
and Ziyadov 2011). To succeed, it had to stop the unfair exploitation by others of its resources—
it had to renegotiate a contract signed in the colonial regime that gave a disproportionate share
of the benefits of the diamonds to De Beers. It succeeded, and it succeeded in developing a
cohesive set of policies.

54
Early on, it placed heavy emphasis on education, and developed a

vibrant tourist industry. Most recently, it has developed a strategy of ‘beneficiation’, of ensuring
that a larger fraction of the processing of diamonds occurs in Botswana—a departure from the
colonial model where the developing countries were thought of only as a source of raw materials,
with the ‘value added’ processes occurring in developed countries.

There were many reasons that developing countries like Botswana had long been simply a source
of resources, with most of the ‘value added’ occurring in the developed countries. Their workers,
for instance, might not have the requisite skills. But this only pushed the question back: why
hadn’t they developed the skills?

One reason for the current global economic structure is that, in fact, the international trade
regime continues to try to enforce the model in which developing countries are limited to
producing natural resources. Advocates of a ‘true’ development round at the World Trade
Organization insisted that the bias built into tariff structures towards keeping developing
countries producing low value added products through tariff escalation be eliminated;

55
the

advanced countries resisted—a part of the reason for the failure of those negotiations.
56

The challenge of resource-poor Ethiopia, Mauritius, and Rwanda, was, however, even greater.
The countries differ in many ways, but they had one thing in common: they all adopted the East
Asian development state model. They did so deliberately.

They focused on industrialization and learning—reversing the mistakes that had been made
under the IMF and World Bank tutelage in the structural adjustment programmes (though
retaining some of the good lessons, such as sound fiscal systems). While the World Bank was
telling countries to spend its educational resources just on primary education, and even then to
charge the poorest people in the world for this limited education (in a programme called cost
recovery), Mauritius took a different course, providing free college education to all of its citizens.

In the late 1990s, the World Bank began a re-examination of these policies, as reflected in the
1998–99 World Development Report. At one level, these policies were understandable:
resources were scarce, and money recovered from charging tuition could be spent elsewhere on
development projects; and besides, universal primary education seemed more equitable than
giving more advanced education to a few. At the same time, cost recovery did discourage the
poorest from sending their children, and especially their daughters to school; and a focus on
primary education meant these countries would be condemned to producing basic
commodities—they could not move up the development ladder, as Korea and the other East
Asian countries had done.

54
As I explained in Globalization and its Discontents, it did this not by following the dictums of the IMF and the World

Bank, but by taking up the guidance of the Ford Foundation. See Stiglitz (2002a). Botswana’s high level of
inequality—with a Gini index of 51.3 in 2010—is, however, cause for concern (according to latest World Bank
data).

55
See Charlton and Stiglitz (2005a, 2005b).

56
Probably more important, however, was the refusal of the US, in spite of its rhetoric about free trade, to cut its

cotton subsidies, even though those subsidies had already been declared WTO illegal by the WTO appellate court.

Some of these African countries also got significant aid from China—not to take resources out
of their country, for they had none, but out of a longer-term perspective that saw the value of
engagement even if there were no resources to be exploited. (Western governments seem to have
picked up the short-sightedness of their business enterprises, perhaps because of the revolving
doors, the constant movement of the leaders between the government and business.)
Unfortunately, several of them picked up a less savoury aspect of some of the East Asian
countries—a less than 100 per cent commitment to democratic values.

South Africa

South Africa had the good fortune of an endowment of good land and weather and rich
resources (gold and platinum). But it was marked by some of the worst exploitation in the world,
by white South Africans of black South Africans. Apartheid’s exploitation took many forms,
including constraining economic opportunities of the blacks (taking away their land and
restricting their ownership of land in many parts of the country).

In some ways, the post-Apartheid era went better than many expected. There was relative
political, economic, and social stability. The strong sanctions imposed upon the country in the
Apartheid era forced them to become more self-reliant and diversified.

Still, the legacy of the Apartheid era hangs heavy—including the effects of the deprivation of the
majority of their citizens of adequate education opportunities. And the ‘orthodox’ economic
policies, designed to gain for the country the confidence of the international community,
succeeded in doing that—but not in promoting growth or employment or reducing inequality.
Indeed, Arndt et al. (2016) in their review of 16 African countries, classify South Africa in the
category under the heading of ‘uninspiring or negative economic growth and corresponding
stagnation or increases in poverty’.

Other explanations of Africa’s successes and failures

These examples of success in Africa not only show that success is possible—even without an
abundance of natural resources—but they also demonstrate that some of the arguments put
forward for the inevitability of failure in Africa are simply wrong. Some claimed that landlocked
and mountainous countries faced huge geographical disadvantages,

57
or that existing in the

tropics was a natural handicap; and with so many African countries facing these liabilities, it
would not be surprising to see low growth. But as Meles Zenawi, the late president of Ethiopia
put it, ‘geography is not destiny’. Ethiopia, mountainous and landlocked, has had some of the
highest rates of growth ever. (There was always something curious about the argument: after all,
Switzerland is landlocked and mountainous, but has been one of the richest countries in the
world.)

Africa’s poor performance is also blamed on its ‘governance’, on pervasive corruption. It is true
that there are problems with public governance in many countries—but the same was true in
other countries, including South Korea, the United States, and UK at earlier stages in their

57
See for example Diamond (2005) and Sachs (2000).

development. An equally forceful argument can be made that poor governance is in part a
consequence of low incomes. And governance is far from perfect even in the best of countries.

The lessons of the failures of the Washington Consensus

The real lesson is that the kinds of policies that worked in East Asia can work in Africa; these
require an active government—a developmental state. By contrast, the good governance agenda
based on restraining government restricts what government can do, and thus limits the potential for
the creation of wealth and development. Limitations in governance should shape how the
government goes about developmental activities, not whether it should undertake such activities.

Moreover, the constraints imposed by the Washington Consensus/structural adjustment policies
constrained institutional learning and development. There was, in addition, the belief that
institutional and legal ‘transplants’ would take hold, would save the countries from grappling
with the difficulties of figuring out for themselves what the best institutional arrangements were.
In earlier work (Stiglitz 2002a), I and others complained that these transplants often did not take
hold: the one-size-fits-all policies were not well-suited for the situations in which these countries
found themselves.

59
An intellectual property regime that might be appropriate for the US

60
was

simply wrong for a developing country trying to close the knowledge gap between itself and
more advanced countries.

61
Here, though, I am emphasizing something quite different: the

process of figuring out for oneself the right institutional arrangements is itself part of the
development process; it is only through such processes that one learns, and in particular, learns
how to adapt to changing circumstances.

Thus, even if the Washington Consensus policies had succeeded in promoting savings and static
efficiency (which they typically did not), even if they had thus succeeded in promoting the
conditions for wealth accumulation as it had traditionally been conceived, they would have failed
to promote development.

Markets by themselves will not succeed in the structural transformation that is necessary for
successful development. The government needs to play a central role, even if its role is limited,
e.g. to being a catalyst or to providing finance or to regulating the economy to limit negative
externalities.

Thus, the Washington Consensus policies, by limiting the role of the state and limiting the ability
of the state to increase its capacities inhibited development.

58
The form of corruption may change as well, as we noted earlier. In advanced countries, it typically does not take

the form of stuffed plain brown paper envelopes; it is more commonly in the form of campaign contributions
(disclosed and undisclosed).

59
See also Kennedy and Stiglitz (2013).

60
Even that is a matter of controversy—I have argued elsewhere that the American intellectual property regime is

best seen as resulting from the influence of its most powerful lobby groups, its pharmaceutical and entertainment
industries, rather than designed to promote innovation and the advancement of science. See Stiglitz (2006a, 2008c).

61
See Stiglitz (2008c, 2014b), Cimoli et al. (2014), and Dosi and Stiglitz (2014).

62
Many of these ideas are developed further in Lin (2011, 2012a, 2012b); Stiglitz and Lin (2014); Stiglitz et al. (2014);

Stiglitz (2011a); and Greenwald and Stiglitz (2014a, 2014b). Even in developed countries, markets do not do a good
job in managing structural transformations, e.g. from an agrarian economy to manufacturing, or from a
manufacturing economy to a service economy. See Delli Gatti et al. (2012a, 2012b).

3.3 The failures of Eastern Europe and the countries of the former Soviet Union in the
aftermath of the fall of the Iron Curtain

The failure of the communist system did not come as a surprise, at least to most economists.
Central planning—‘Gosplan’ in the Soviet Union—could not work: it simply required the
collection, transmittal, and processing of more information than any entity could undertake. The
absence of incentives inevitably had an enervating effect. Or more accurately, what incentives
there were often had perverse effects. Firms had quotas on the production of nails, but had no
incentives to produce nails that actually worked, that would not break when hammered. There
were incentives to go around the system. Indeed, often one could meet one’s quotas only by
doing so. And this in turn led to a kind of disrespect for the system itself. This was amplified by
the contradictions between the equalitarian ethic which it professed and the luxuries in which
those in the ruling class lived. A system supposedly based on principles of fairness and equality
had morphed into a system of privileges, often transmitted across generations.

In some respects, the system did perform better than expected. The Soviet Union and some of
the other countries with communist regimes excelled in education, especially in science and
engineering. They even managed a few major scientific projects—Sputnik, the first satellite,
served as a wake-up call to the West that they needed to invest more in science.

But what happened after the collapse of the Iron Curtain did come as a surprise.
63

With the
replacement of central planning by the markets and the decentralized price system, with the
incentives provided by the market and private property, it was assumed that these countries would
experience a burst of growth. Incomes would, of course, be lower than they would have been if
the investments that had been made before the fall of the Iron Curtain had been better designed.
But at least these countries were starting with a well-educated labour force.

Incomes, though, fell dramatically in the initial years of transition. The declines in GDP numbers
in the former Soviet Union were joined by demographic statistics showing a remarkable fall in
life expectancy. The defenders of the policies being foisted on these countries by the IMF and
the World Bank—variants of the Washington Consensus policies in Africa and other developing
countries—almost took pride in this. The belief among the ‘shock therapists’ was that a quick
jolt to the economy would set the stage for more robust growth going forward. They argued that
rapid privatization, a quick macroeconomic adjustment, and full trade and market liberalization
would set the stage for the free market to do its wonders.

Others argued that a successful market economy could only be based on a good institutional
infrastructure; the distrust of institutions, the lack of respect for the ‘rule of law’ that these
countries were beginning from, would prove to be a major handicap.

The debate was as much about sequencing as it was about pacing. The shock therapists believed
that magically, once there was private property, those in the Soviet Union would demand a rule
of law to protect their property. Again, others, including me, were more sceptical. One should
not expect a monopolist to demand good competition policies; neither Bill Gates nor John D.
Rockefeller were the strongest proponents of such laws, laws that attempted to redress
imbalances of political as well as economic power.

Elsewhere, we had seen the elites demand corporate governance and other legal structures that
would advantage the elites at the expense of the rest of society. And until good corporate

63
For a broader discussion of the issues, see Ellerman and Stiglitz (2000, 2001) and Stiglitz (2000a, 2000b).

governance occurred, those who controlled firms could, and would, steal from the rest. All of
this would undermine trust in society and faith in the market economy. Making matters still
worse, undermining the alleged incentive to create a rule of law within, say Russia, was the fact
that the oligarchs had free rein to take their money out of the country—and they could use the
rule of the West to protect their ill-gotten gains. So long as there was money to steal in Russia, it
paid them to preserve the legal framework which allowed them to steal.

Matters turned out even worse than the critics of shock therapy feared: some American advisers
were corrupted in the process, using inside information to make a killing and channel their gains
into the Cayman Islands.

The defenders of shock therapy passed off all of this as a minor hiccup. In the long run, growth
and democracy would prevail. But as Keynes famously said, in the long run we are all dead. We have
a long enough run now—more than a quarter of a century since the fall of the Iron Curtain to
evaluate the various claims. And unfortunately, it appears that matters are only a little bit better
than they were in the years immediately after the crisis.

There are a couple of success stories. Poland, which took a gradual approach to institutional
reform, including privatization

65
had an average rate of growth between 1991 and 2013 of 3.7 per

cent.
66

In general, the countries that joined the European Union, as a condition for joining had
to adopt conforming institutional and legal frameworks, helping to propel their success.

There were many studies done in the early years of the transition (including a World
Development Report at the World Bank) that argued for the virtues of a quick transition, rapid
privatization, and liberalization (i.e. shock therapy). It is now a quarter of a century since the
beginning of transition, and it appears clear that these policies have been counterproductive.
Even if a few countries that undertook shock therapy initially seemed to do well, the tortoise has
outpaced the hare: the countries that eschewed shock therapy have in the long run done better.
This reinforced what seemed to be the case just a decade into the transition, where China, which
took a more gradualist approach, markedly outperformed Russia, the signal failure of shock
therapy.

Of course, when oil prices have been high, Russia has done well—nearly 70 per cent of its
exports are based on oil and gas. But Russia has gone from being an industrial economy to a
natural resource-dependent economy. And it has not been able even to transform those
resources into a form that ensures prosperity for its citizens.

64
McClintick (2006).

65
There is some controversy over the interpretation of the Polish success story. The country did go through an

episode of ‘macroeconomic’ shock therapy, and the advocates of shock therapy attribute Poland’s success to that.
But as I noted, privatization and other reforms were done much more gradually, and many argue that it was this
gradualist strategy that accounts for its success. More recent cross country evidence (comparing its success with the
failures elsewhere) is consistent with the latter interpretation.

66
Source: World Bank data. Like many countries, its growth since the global financial crisis has been volatile, but

on average, it has been very good.

67
See Stiglitz (2001a, 2001b) and Ellerman and Stiglitz (2000, 2001) who also provide an explanation for why shock

therapy did not work. Godoy and Stiglitz (2007) looked at the data a half-decade later, and the case for gradualism
was, by then, even stronger. A look at more recent data, both before and after the global financial crisis, reinforces
these conclusions. Several of the seemingly successful shock therapy transitions were based on unsustainable real
estate booms.

Russia illustrates the disjunction between the creation of wealth of individuals and the wealth of
the nation: today, there are a few very, very rich Russians (the oligarchs) and many rich
Russians—enough that the restaurants at the luxury spots throughout Europe have menus
printed in Russian, and the stores have salespeople who are fluent in Russian. But apart from this
very limited trickle-down from the oil and other resources, there has been limited wealth
creation. In some ways, the country is poorer than it was before the transition: the universities
are weaker, and many of the talented people have migrated abroad. The economic failures in the
transition run parallel to those that characterized the failures of development discussed in the
preceding subsection: a focus on static resource allocations rather than creating a learning
society. But there are several other themes that Russia’s experience highlights, in particular the
failure to create a cohesive middle class society with a rule of law designed to protect ordinary
citizens. Rather, the country has become what many would describe as a lawless society, the ‘wild
east’ (referencing the lawlessness in the early days of America’s ‘Wild West’).

68
Legal forms, like

bankruptcy laws, were used to seize property.

It was not inevitable that the transitions would be so disappointing. China and Viet Nam have
been making a transition to a market economy, and both have experienced almost unparalleled
growth. But these countries did not follow the dictates of the Washington Consensus. Both were
greatly influenced by the economic policies pursued by other East Asian countries, the
‘developmental state’ that we described earlier. In many ways, these countries successes were
even greater than their neighbours’.

3.4. A brief historical perspective

The last thirty-five years have been momentous. The world as a whole grew at an unprecedented
rate. It seemed as if, suddenly, the laggards, especially the countries in Asia, finally learned the
lessons of growth from the leaders, from Europe and America. An historical anomaly was at last
being corrected: about two hundred years ago, India and China accounted for around half of the
world’s population and close to half of its GDP. But then, as a result of unfair trade agreements,
colonialism, oppression, exploitation, and the force of arms, combined with failures within Asia,
the advanced countries pulled ahead, to the point where in the middle of the twentieth century,
these two giants accounted for less than 10 per cent of global GDP.

70
Gaps in other indicators

opened up too—in life expectancy, for example. But in the last third of a century, all of this has
changed. Earlier, we noted that China had become the largest economy (in PPP terms) in the
world. China and India together now have 23 per cent of the world’s GDP.

71
The gap in life

expectancy is narrowing too.

All of this is much as it should be. There are no real secrets in the story of increasing societal
wellbeing, in increasing the wealth of nations. Knowledge should flow across borders. And one

68
This view contrasts markedly with the view of Shleifer and Treisman (2004), who have argued that Russia is just a

‘normal economy’. For a theoretical discussion of why Russia and some other former Communist countries got
trapped in this state, see Hoff and Stiglitz (2004, 2007).

69
Some have argued that the success of these countries was because they were at an earlier stage of development;

they were still largely agrarian economies. Such arguments are unpersuasive: development is difficult. So is
transition. There is no reason that making a transition to a market economy at the same time as one is making a
developmental transformation would make both tasks easier; on the contrary. Moreover, there is no evidence that
the economies making the transition that were more agrarian were in general more successful.

70
Data from The Maddison-Project, http://www.ggdc.net/maddison/maddison-project/home.htm.

71
World Bank data (in PPP terms, 2011 benchmark).

of the great achievements of globalization has been to facilitate the flow of knowledge—this has
been far more important than the flow of goods or even the movement of capital.

Globalization has, however, the potential of being a mixed blessing. The deficiencies in the
governance of the global economy are well known. In many areas, these deficiencies have
allowed the dominance of certain ideologies (the market fundamentalist ideologies which have
had such a destructive effect on development), and sometimes that has led to international rules
of the game that have been adverse to development and stability. (Beginning in 2001, there was a
hope that at least the rules governing trade would be changed to be more supportive of
development, with the initiation of the development round of trade negotiations within the
WTO at Doha.

72
In December, 2015, however, the WTO abandoned even the pretence of

rectifying the imbalances of previous trade agreements, in the face of the recalcitrance of the EU
and the United States. While they spoke of the importance of open and free markets, they
refused to abandon their agricultural subsidies.)

Even if these rules of the game have allowed some developing countries to ‘converge’ toward the
more advanced countries, these rules of the game are also adverse to creating shared prosperity
within each country.

But this in turn has played into the nexus of politics and economics: greater economic inequality
led to greater political inequality, and greater attention being paid to the ideas, perspectives, and
interests of those at the top. The result was further ‘reforms’ along the same lines.

The ideology of the Washington Consensus ‘reforms’ may have been good for getting more
money to the top, but it was not so good for creating wealth and advancing development.
Eviscerating the state—making it too weak to redistribute or even to impose progressive taxation
also meant it was too weak to govern effectively—undermined its ability to provide for the
collective good. It even undermined the ability of the public sector to take actions that were
complementary to the private sector, such as the provision of basic research and infrastructure
and a regulatory framework that stopped some from exploiting others.

The oil-rich countries paid a high price for creating a rent-seeking exploitative society: their
performance was astoundingly poor in spite of their riches. These ideas also came to dominate in
countries that could ill-afford them. Today, in some parts of the developing world, there is a
sense of disillusionment: socialism did not work, but neither did the seeming alternative, neo-
liberalism. Even when it produced credible growth numbers, large fractions of the society were
left behind. Where were they to turn if they wanted sustainable and equitable growth? Hopefully,
the ideas presented in the first section of the paper provide the basis of an alternative approach.

While the discussion of this section has focused on three major events within the developing
world, I should also note that there have been three major events within the developed world
that have reshaped thinking about the role of state: (a) the 2008 crisis showed definitively that
private markets, on their own, were neither efficient nor stable, and it was only through massive
government action that the economies in the North Atlantic were saved; (b) the experiment,
begun in the mid-70s and early 80s, with neo-liberal ideas in the United States and Europe led to
lower growth and more instability—and especially in the United States, the fruits of the growth

72
See Charlton and Stiglitz (2005a, 2005b). There was a moment when the advanced countries realized that simply

bringing down trade barriers would not suffice; the developing countries needed aid to enable them to participate
fully in the global economy. The initiative of aid for trade (Charlton and Stiglitz 2006a, 2006b, 2008) too seems to
have been shunted aside.

were increasingly concentrated in the top—so much so that median incomes were stagnant for
more than a quarter of a century (see Stiglitz et al. 2015); and (c) the Eurozone in what could be
thought of as an experiment in intense globalization/integration at the regional level, plunged
into recession, with many of the countries falling into depression. Policies, guided by the same
kinds of ideas that had failed during the East Asian crisis, had similar results in Europe (Stiglitz
2016, forthcoming).

All of these experiences, not surprisingly, have contributed to a re-examination of the role of the
state and markets, not only in developed countries, but also in the developing world and of
globalization. The crises, for instance, were in no small measure a result of inadequate regulation,
especially of the financial sector, and of central banks focusing just on inflation, rather than
having a broader mandate, including growth, employment, and financial stability. The
depressions in parts of Europe were the result of austerity policies. The failure of the countries
of Europe to converge after the founding of the euro was, in part, the result of proscriptions
against industrial policies. The failure of the Eurozone itself was an example of economic
integration outpacing political integration.

4 Some major strands of new thinking

The previous section outlined some of the major events that have shaped our thinking about the
role of the state. But our understandings have also been affected by broader changes in
economic analysis over the past three decades. Many of these changes are particularly salient for
developing countries, where information is imperfect and markets are incomplete and far from
perfectly competitive. The essence of development is change, learning, and an alteration in
mindsets—all of which, as we have noted, are outside the standard frame but have been at the
centre of recent developments in economics. In the following paragraphs, I briefly describe some
of those that are most salient to the analysis presented earlier.

4.1 Behavioural economics

Standard economics, as we noted earlier, began with the premise of fixed preferences and beliefs
and with individuals that are rational (that is, act consistently) with rational expectations (fully
absorbing all relevant information). It was obvious that these beliefs about human nature were,
in a fundamental sense, wrong. The question, however, was whether they provide a sufficiently
good approximation to underpin reasonable models of the economy, yielding meaningful
predictions and providing the basis of policy advice for the advancement of development and
the improvement of wellbeing.

The 2008 crisis showed that even for advanced countries—where it might be hoped that these
assumptions might best be satisfied—the models provided a very bad basis for policy. There was
ample evidence that individuals did not behave rationally and in ways consistent with rational
expectations.

Behavioural economics, the importance of which had already been recognized by the award of
the Nobel Prize to Danny Kahneman, finally seems to have come into its own. Most of the
earlier work in behavioural economics, however, was based on psychology; individuals behaved
‘predictably irrational’. That is, there were systematic biases in their behaviour—systematic
differences from the way that the standard model predicted. For instance, confirmatory bias meant
that individuals processed information that was consistent with their prior beliefs differently
from that which was not. The result was that there could be ‘equilibrium fictions’, beliefs that
were consistent with the way individuals saw the world, given those processing errors. Hoff and

Stiglitz (2010a, 2010b) used this construct to explain the persistence of dysfunctional beliefs,
such as those associated with caste and race. These theories went beyond previous theories of
statistical discrimination to explain how these beliefs altered behaviour, and to show how in such
a world there could exist multiple equilibria.

This strand of behavioural economics has important implications, including for development
economics. One of the important insights of behavioural economics is the importance of
‘defaults’ and nudging. It may be relatively easy to increase savings rates, simply by employers
having the default retirement programme based on 15 per cent of income, rather than 5 per cent
or 10 per cent. This is true even if individuals are left with a choice of the lower numbers.

But there was another important strand in behavioural economics that extended the boundaries
of the standard economic model to include sociology. It argued that beliefs were in fact largely
determined by those around us. The lens through which we see the world is not fixed, but
shaped, in particular by the society to which we belong. This is, of course, consistent with the
marked differences in belief systems of different societies (or subgroups within the same society).

Hoff and Stiglitz (2010a, 2010b, 2016) and the 2015 World Development Report (World Bank
2015) showed how important these ideas are for development. They provide insights into both
societal rigidities and societal change. If one individual’s beliefs are largely determined by those
around him, it may be very difficult to change any individual’s beliefs or behaviour. One has to
engage in massive changes. Such changes have, of course, occurred from time to time, and
understanding the circumstances in which such changes occur should be an important part of
development research.

These changes in beliefs and behaviour are at the heart of development. As I argued earlier,
perhaps the most important part of the developmental transformation is the change in mindset
that recognizes that change is possible and welcomes change. The Enlightenment itself, which
has been the basis of the enormous increases in standards of living over the past 200 years, was
first and foremost a change in mindset. Changes in attitudes about gender, race, and caste are
among the most important aspects of the progress that we associate with development.

The 2015 World Development Report emphasizes, as we have already noted, that this introduces
a new set of instruments for changing behaviour. Exposure to soap operas, for instance, may
change attitudes towards gender and education.

These advances suggest that the standard micro-foundations for savings behaviour (maximizing
an intertemporal utility function) may not provide as good a description of savings and
borrowing behaviour as alternative models, and that predictions and policies based on that
model are likely to go badly awry. Promoting savings is an important ingredient for development,
so this is important in the formulation of development strategies. Interestingly, the countries that
were most successful in increasing interest rates (in East Asia) did so not by focusing on the
‘standard model’, and interest rate-incentives, but by focusing on enhancing the safety and
convenience of savings—and in the case of Malaysia and Singapore, through ‘provident funds’
(effectively forced savings).

These approaches also provide a fundamentally different view of one of the most important
innovations in development—micro-credit. Some earlier interpretations focused on the
advantages of peer-monitoring (Stiglitz 1990). Similarly, some of the interpretations of the major
failure of micro-lending in India focused on either the failure to sufficiently employ peer-
monitoring technologies and/or the growth of multiple micro-lenders, resulting in some
individuals becoming over-indebted. But an alternative perspective focuses on the change in

‘culture’, the move from a not-for-profit model to a for-profit model, which altered the
behaviour and attitudes of both borrower and lender. In the not-for-profit model of Grameen
and BRAC (Bangladesh Rural Advancement Committee) in Bangladesh, lending was simply one
instrument in promoting a developmental transformation. The lending institutions were engaged
in changing attitudes toward gender and authority. They were committed to enhancing the
wellbeing of their borrowers. The borrowers recognized this, and this reciprocal respect led to
very high repayment rates. It was not incentives that drove repayment (the worry about the
consequences of non-repayment, which entails a cost-benefit analysis of the costs and benefits of
reneging)—though undoubtedly incentives are important—but rather social obligation and
cohesion. But when borrowers believed that the lenders were out to make money off of them—
when they came to be perceived as exploitive subprime lenders, as happened in India—then that
sense of obligation disappeared. All that remained was the economic calculus. And that opened
up the door both to strategic default (e.g. when economic circumstances change so that many
borrowers cannot repay, then those who can repay do not, assuming that the lender cannot
distinguish them from those who really cannot repay) and to political demands for debt
restructuring (Haldar and Stiglitz 2013a, 2013b).

With endogenous preferences, there are significant problems in making welfare assessments. But
we can make unambiguous descriptive statements that are of central relevance for development,
e.g. that the changed attitudes about gender roles that can be engendered through preference and
belief changes can have larger and more sustained effects on decisions about reproduction,
education, and labour force participation than simple price changes.

4.2 Endogenous technology: learning

The standard theory (Arrow–Debreu) assumed fixed technology, or, if it were changing, that the
changes were exogenous and fully anticipated (though sometimes with uncertainty). In fact,
again, the essence of development is ‘catching up’ to the technology in advanced countries. As
we noted earlier, Solow’s work emphasized the role of improvements in technology in increasing
living standards, and Schumpeter, before him, had argued that technological change was
endogenous. While there were many economists who had developed models as far back as the
1960s formalizing endogenous technological change (including the work of Arrow, Uzawa, Shell,
Atkinson, Stiglitz, Fellner, etc.), curiously, it was not until Romer’s work in the 1980s and 1990s
that this work seemed to enter the mainstream. But even then, the full implications—most
importantly for policy—were not noted: markets were not in general (Pareto) efficient when
technology was endogenous, so that there was always a potential role for the state; and policies
that focused on improving the static allocation of resources, or even an increase in assets, were
often counterproductive when promoting learning and the advancement of knowledge and
closing the knowledge gap between developing and developed countries, and the knowledge gap
within the country.

73
There typically was, for instance, an optimal degree of protectionism.

Moreover, the direction of innovation in advanced countries—saving labour—was markedly
different than that appropriate for developing countries.

73
There were pervasive market failures associated with competition, externalities, and the absence of perfect risk

and capital markets. Moreover, knowledge is a public good, and one cannot expect private markets to be efficient in
supplying public goods. See Arrow (1962a, 1962b) and Stiglitz (1987).

74
See Greenwald and Stiglitz (2014a, 2014b), Stiglitz (2015a), and Stiglitz and Greenwald (2014).

75
Markets were, moreover, inefficient not only in the level of innovation, but in the direction. See Stiglitz (2006b,

2014c). Standard theory presumed that developing countries would converge to the developed; this too came to be
questioned (Stiglitz 2015a).

These advances in our understanding have broad implications for developmental policy, some of
which we have already noted. Because development entails closing the knowledge gap that
separates developing from developed economies, there are a broad range of industrial policies that
governments can and should undertake to promote sectors and technologies with greater scope
for learning and with greater spillovers for other sectors. While some of the standard wisdom
(e.g. concerning protectionism) has been shown to be misguided, in other cases, it provides a
further argument for the conventional prescriptions. In the next section, for instance, we explain
how advances in macroeconomics have enhanced our understanding of government
interventions that promote stability. Stiglitz and Greenwald (2014) explain stable macroeconomic
environments are more conducive to learning, thus expanding on standard arguments for the
desirability of stability and against policies (like financial sector and capital market liberalization)
that are associated with greater macroeconomic instability.

4.3 Macroeconomic externalities and financial market imperfections.

The standard macroeconomic model that preoccupied much of the economics profession in the
decades before the crisis was based on extreme simplifications—the perfect market model. And
economic advice to the developing countries was aimed at making them move towards this ideal.
Accordingly, financial, capital market, and trade restrictions were viewed as an impediment to
development and growth. But Greenwald and Stiglitz (1986), among others, had shown that
markets that even slightly deviated from this ideal (such as those with imperfect and asymmetric
information) were not efficient—there were pervasive pecuniary externalities. The Greenwald–
Stiglitz theorem thus reversed the presumption that markets were efficient, which underlay the
Washington Consensus policies. There were not just a few isolated market failures (like
environmental externalities)—market failures were pervasive. The Greenwald–Stiglitz theorem
thus reversed the presumption that markets were efficient, which underlay the Washington
Consensus policies.

The extension of these ideas to macroeconomics was shown to lead to all manner of problems,
and macroeconomic policy has to be designed to take them into account. For instance,
unfettered markets would be characterized by excessive foreign-denominated borrowing and
excessive risk-taking by banks. This in turn implied that regulations circumscribing these were in
fact desirable.

Moreover, in the standard model, especially in variants employing representative agents, there
was no meaningful financial sector. All that mattered could be summarized in the money
demand equation, which determined interest rates. The models had nothing to say about debt or
the debt equity ratio—let alone what many view as a central problem, excessive leverage by firms
or households and excessive indebtedness by government. Indeed, with the representative agent
simply owing money to himself, debt should not matter at all. (This did not prevent the IMF and
central banks that employed these models from lecturing about the dangers of excessive

76
There are further, direct arguments against financial market liberalization: it is important for countries to learn

how to allocate capital efficiently, and financial market liberalization impedes that. Moreover, information
imperfections result in foreign financial institutions lending less to small and medium-sized enterprises than
domestic financial institutions, and thus impeding growth.

77 See, e.g. Korinek (2012) and Jeanne and Korinek (2013). For a review of where the standard macro-model went
wrong, see Stiglitz (2011b, 2013a). For a discussion of some of the implications for macro-policy see Griffith-Jones
et al. (2010) and Blanchard et al. (2012).

indebtedness. This is an example of prevailing cognitive dissonance, other examples of which we
shall note below.)

Though policy focused on what central banks should do, in the models, there were no banks—
and if the models had provided a good description of the economy, there would have been no
central banks. Because there was no meaningful financial market, key issues like transparency of
derivatives, too-big-to-fail banks, and the shadow banking system could not be addressed. Nor
were the models able to address issues of financial contagion and excessive interdependence—
issues that played out dramatically in the 2008 crisis. Indeed, the standard models seemed to
suggest that the more interlinked the markets, the more diversified the risk, and thus the better
the economic performance. So confident were some policy makers with this ‘insight’ of ‘modern’
economics that they were not even worried when America’s subprime mortgage market cratered.
(As another example of cognitive dissonance, policy makers, including those at the IMF, talked
about the advantages of diversification before a crisis and the dangers of contagion—which were
increased by the interlinkages associated with diversification—after a crisis.)

Again, fortunately, advances in economic theory had addressed essentially all of these issues well
before the crisis. There had been important developments in financial market economics,
including advances emphasizing the importance of credit rationing and liquidity; developing
theories of banking; and analysing financial market contagion, including risks of bankruptcy
cascades.

78
Greenwald and Stiglitz (2003) had used some of these ideas to advance a New

Paradigm for Monetary Economics, which included an analysis of the implications of credit rationing
for monetary policy and showed the importance of regulatory policy for macroeconomic
stabilization.

79
Furthering the call for more instruments and broader goals, they showed that monetary

policy should not be limited to just the control of the interest rate. There were a whole range of
instruments at its disposal, and it should use all of them (see also Stiglitz 2014a).

Since then, there have been further advances in all of these areas, too extensive even to provide a
meaningful bibliography. Here, we simply note a few core ideas.

We observed earlier the strong belief that diversification would lead to more stability. The
underlying mathematical reason for this was that the models made strong assumptions
concerning concavity. While earlier work in mathematical economics had employed these
assumptions (including Samuelson’s Foundations of Economic Analysis, 1947) more recent work had
uncovered a wide set of important circumstances where that assumption seemed inappropriate:
imperfections of information (Radner and Stiglitz 1984; Arnott and Stiglitz 1988); R&D and
learning; many forms of externalities (Starrett 1972); and bankruptcy. Under these circumstances,
diversification could actually lead to more risk. There would, under such circumstances, be an
optimal degree of diversification; and optimal policy might entail capital controls.

Many of these advances in our theoretical understandings have been supported by empirical
findings. Rashid (2013) for instance, showed that financial market liberalization had adverse
effects on economic performance. Others have shown that capital market liberalization and/or

78
See Allen and Gale (2000), Greenwald and Stiglitz (2003), Battiston et al. (2012a, 2012b, 2013).

79
They also provide citations to some of the literature up to that date. They show how these ideas provide insights

into the East Asia crisis.

80
Again, the literature on these topics is extensive. Stiglitz (2010a, 2010b) provides a simple model showing that

diversification may lead to more risk, and Battiston et al. (2012a, 2012b) analyse the optimal degree of
diversification.

financial market integration does not bring the hoped for benefits and may even be bad for
growth and stability.

Multiple equilibria

By the same token, while the standard models, with their strong concavity assumptions, typically
generated unique equilibria, we have already referred to many circumstances in which there can
be multiple equilibria.

82
This is important for development, because developing countries can be

trapped in a low-level equilibrium (Hoff and Stiglitz 2001); and because some groups within a
country can be locked into a poverty trap.

Such models provide a context for theories of a ‘Big Push’: with such a push, the economy may
move from the low-level equilibrium to a better equilibrium.

84
The market will not do this on its

own: the economy will remain trapped in a bad equilibrium. Concerted government action is
required—a quite different role for the state than those upon which we have focused in this
paper. In these cases, the role of the government is limited: once it succeeds in moving the
economy into the ‘good’ equilibrium, no further action is required. By contrast, in the cases
where there are marginal distortions, a continued presence of government is required.

Similarly, in some situations where there is a poverty trap, the government may be able to push
the group trapped in poverty into a better equilibrium. This may be especially true in
‘discriminatory’ equilibria (such as those associated with the Hoff–Stiglitz equilibrium fictions).

In these cases, affirmative action programmes or legal restrictions on the use of race and gender
may move the economy into a new equilibrium, after which again continued government
intervention may not be needed.

5 Concluding remarks

I ended my WIDER AL calling for a focus on sustainable, equitable, and democratic
development:

The post-Washington consensus recognizes both that a broader set of instruments is necessary
and that our goals are also much broader. We seek increases in living standards—including
improved health and education—not just increases in measured GDP. We seek sustainable
development, which includes preserving natural resources and maintaining a healthy
environment. We seek equitable development, which ensures that all groups in society, not just
those at the top, enjoy the fruits of development. And we seek democratic development, in
which citizens participate in a variety of ways in making the decisions that affect their lives.

81
Some IMF studies corroborated these findings. For a theoretical model explaining why capital market

liberalization may increase volatility, and comments on the IMF studies, see Stiglitz (2008b).

82
See Hoff and Stiglitz (2004, 2007).

83
Including low-level discriminatory equilibria. See Stiglitz (1974) and Hoff and Stiglitz (2010b).

84
See Murphy et al. (1989) and Stiglitz (1993c).

85
This distinction was, to my knowledge, first noted in Stiglitz (1972).

86
See also Stiglitz (1974).

Our understanding of the economic role of the state and how it can best be performed has
increased a great deal in the three decades that WIDER has been engaged in studying these
issues, or even the eighteen years since I delivered my lecture at WIDER.

In spite of these advances, and in spite of the many topics I have talked about, there are many
areas that need further research, and many relevant topics I have not touched upon. I would be
remiss not to mention a few of these.

5.1 Devolution and globalization

One is the level of state activity—sub-local, local, national, and global. The nation-state is still the
primary locus of state activity, but within most countries there have been active discussions of
devolution. As globalization has proceeded, rules and regulations are being set by international
bodies and agreements. With the development of concepts like local and global public goods,

there is the beginning of the development of a theory of devolution, and even a theory of state
formation.

A major concern is that the manner in which globalization has proceeded has increased the need
for state action, e.g. to combat consequences for inequality and instability, but circumscribed the
ability to do so.

90
The ability to deal with this and other cross border problems is constrained by

the global political economy, an area that is more complex and less developed than the political
economy of nation states.

5.2 Improving the performance of the public sector

A second important topic focuses on how to improve the performance of the public sector.
There have been many innovations, in the delivery of particular services, in the organization of
the public sector, and in the measurement of performance. Some, as we noted in the
introduction, have already proved their worth in certain contexts; whether they will be as
effective in others remains an open question.

In spite of the prejudice that the public sector is less efficient than the private, there are a host of
circumstances, some noted here, where this is not true. Many years ago, Herb Simon (Simon
1991) expressed scepticism about that conclusion, and even more about the arguments
explaining the differences in performance that were usually put forward, pointing out that agency
problems were seemingly equally rife in all large organizations, private and public.

Some countries have learned how to curb these ‘agency’ problems, the worst manifestation of
which is widespread corruption. Corruption and other abuses of fiduciary responsibility, of
course, occur both within the public and the private sector. Though as we noted earlier, we
typically do not use the word ‘corruption’ to discuss abuses of fiduciary obligations within the

87
There have been several attempts to formulate a post-Washington consensus, such as the ‘Barcelona consensus’.

See Stiglitz (2008a) and the other papers in Serra and Stiglitz (2008).

88
The concept of local public goods dates back to Tiebout (1956), with a more rigorous formulation given by

Stiglitz (1977, 1983a, 1983b). See also Oates (1999) and Persson et al. (2000). The theory of global public goods
dates to Stiglitz (1995). Since then, there has been a large literature on the subject.
89

See Alesina and Spolare (1997); Stiglitz (2015b). There is an earlier theory focusing on the optimal size of cities.

See, e.g. Arnott and Stiglitz (1979).

90
This is a major theme of Stiglitz (2006a).

91
See, for instance, Stiglitz (2002a, 2006c, 2008c, 2013b); Serra and Stiglitz (2008); Kaldor and Stiglitz (2013).

private sector, both the nature and consequences are similar across sectors. The 2008 financial
crisis exposed a rash of corporate governance abuses within the private financial sector. More
broadly, the excesses of corporate executive compensation in the US, accompanied by short-
sighted behaviour, provide part of the explanation of America’s disappointing economic
performance over the past decade.

92
Governance, including transparency, is important in both the

public and private (as well as not-for-profit) sectors.
93

We need to take a pragmatic view—in some countries state institutions can even be more
efficient and less ‘corrupt’ than private firms: South Korea’s state-owned steel companies were
more efficient than US private steel companies; the US healthcare sector, which is largely private,
is arguably the most inefficient in the world; and the US public social security (retirement)
programme has much lower transactions costs than private programmes.

There has been a great deal of institutional learning on the part of the public sector, at least
within some agencies in some countries. Some have learned from the successes and the failures
of the private sector. We now know more about how government can successfully pursue its
objectives; we know how to reduce the risk of ‘government failure’.

5.3 A changing economy

While I have emphasized the changes in our understandings of the role of the state, I should also
note that there have been changes in the structure of our economy and society that necessitate
changes in the role and size of the state. For instance, the world, including emerging markets and
developing countries, has become more urbanized. In a more urbanized environment,
externalities are more important, including those associated with congestion, the environment,
health, and the use of space.

As countries get wealthier, education and health—two sectors in which government rightfully
has traditionally played a more important role—become more important.

As we have moved to a knowledge and innovation economy, basic research, which necessarily
must be financed by government has become more important.

There are certain changes in technology—like network externalities—that may imply increasing
concentration of market power, necessitating more active competition policies.

As the pace of technology changes, sectoral and product shifts and ‘human capital obsolescence’
become more important, necessitating an increase in active labour market policies.

As economies develop, so too does the financial market, and this growth, together with the
growth of financial innovations, many of which are designed to circumvent traditional
regulations and to take advantage of the unwary, imply a need for more, and more creative,
financial sector regulations.

Trends in the advanced countries over the past third of a century have shown a marked increase
in inequality.

95
This may (and I believe should) necessitate a greater role of government, in

92
See Stiglitz et al. (2015).

93
See Stiglitz (2002b, 2003).

94
Orszag and Stiglitz (2001).

95
See Piketty (2014), Milanovic (2016), and Stiglitz (2012a).

increasing equality and equality of opportunity—in promoting an increase in the equality of
market incomes, reducing the intergenerational transmission of advantage and disadvantage, in
increasing the equality of after-tax-and-transfer incomes, and in ensuring greater equality of
access to certain goods viewed as ‘basic’, like health.

5.4 Contrasting perspectives over three decades

The changes in perspectives concerning the role of the state over the past three decade have
been enormous. Here, I summarize some of these major changes.

Then, there was a presumption that markets were efficient, with the exception of certain well-
defined problems, like environmental pollution. Now, there is a presumption that markets are
not efficient. Market failures are deep and pervasive.

Then, there was a presumption that governments were inefficient—much less efficient than the
private sector. There was much discussion of ‘government failure’, but our understanding of the
intertwining of politics and economics was more limited, and so too was our analysis of how to
address government failures. Then, the response to government failure was to restrict the role of
the government, inhibiting its capacity to learn and improve. Now, we better understand how to
improve the performance of government; limitations of the capacity of the government should
be met by attempting to increase those capacities—and those limitations may affect more how
the government best fulfils its role rather than what roles it should undertake.

Then, the role of government, it was argued, should be limited to certain activities, like
redistribution and the conduct of monetary policy. The rest should be left to the private sector.
Now, we understand that the roles of the two are intertwined: the financial system only functions
because of the backing of government—it is that backing that provides the ‘trust’ that is
required—and to prevent abuses, and to ensure that it does what it should do, there is a need for
regulation. So too in many other sectors of the economy.

Then, we paid little attention to how markets are structured by the legal system. Economists
would simply refer generally to a rule of law, with strong property rights, rigorously enforced.
Now, we realize that markets do not exist in a vacuum, and the government needs to set the
rules that govern the behaviour of the private sector. Markets are structured by our legal
frameworks, there are many alternative legal frameworks (rules governing bankruptcy, corporate
governance, etc.) and the choices a society makes make a great deal of difference, for
development and distribution. Inevitably, these are decisions made by the political system.

Then, the discussion was focused on the role of the state vs. the market; now, we realize that
there are many other institutional arrangements, including not-for-profits and cooperatives.
Some of the most successful ‘developmental innovations’, such as micro-credit, have entailed
such institutional innovations.

Then, discussions of improving the government focused on ‘good governance’, including
transparency and checks and balances within the political system. Now, we know those may be
necessary but are not sufficient. When there are great economic inequalities, those may easily be
translated into political inequalities, with elites using their power to design an economic system
that serves themselves. Thus, equalitarian policies may be important not only for ensuring good
economic performance, but also for the viability of meaningful democracy.

96
See Tobin’s discussion of specific equalitarianism (Tobin 1970).

Then, government single-mindedly pursued the goal of increasing GDP. Now, we realize that
there is a much broader set of goals, and why GDP is an inadequate metric. We realize too that
these goals are intertwined: one cannot have sustained growth if there is not shared prosperity.
This is true not only for government as a whole, but for particular policies.

Then, it was argued, monetary policy should focus simply on inflation. We now know that that
policy was disastrous. Then, it was thought that low inflation was necessary, and almost
sufficient, for good economic performance. Now, we know that monetary policy needs to focus
on not just inflation, but also growth, employment, stability, and even equality.

Indeed, then, it was thought that one could separate issues of distribution from efficiency—
economists should focus on increasing the size of the economic pie, leaving to politics the
division. Now, we realize that the issues of distribution and efficiency cannot be separated.

Then, there was a focus on a limited number of instruments. Monetary policy, it was argued,
should focus on the money supply or the short-term interest rate. Now, we know much more
about how government can fulfil its multiple roles with its broader goals. There is a much
broader set of instruments. There are more tools in the tool-kits.

Then, the narrow goal of maximizing GDP was pursued through improving the efficiency of
resource allocation (eliminating market distortions) and increasing human and physical capital.
Now, we realize that what separates developed from developing countries is a disparity in
knowledge and improving the capacity to learn—including institutional learning—is at the centre
of success. Some of the policies that were promoting static resource efficiency were
counterproductive in the long run, because they impeded learning.

Then, industrial policies were scorned. Now, industrial policies are recognized as an essential part
of the economic transformation that is at the centre of development. Much learning occurs
through learning by doing, and there are extensive spillovers of knowledge from one firm to
another, from one sector to another. Trade and industrial policies can structure production and
the choice of technology to encourage sectors and technologies with greater learning and
learning spillovers.

Then, little attention was paid to institutions and institutional learning. The past thirty years have
seen remarkable institutional learning and developments, such as conditional cash transfers. In
every area, there have been new developments: in macro-policy, for instance, in the use of
macro-prudential regulations. Behavioural economics has provided new instruments for
changing, for instance, fertility behaviour and gender roles.

Then, many still believed in Tinbergen’s analysis, with each goal being assigned an instrument.
Now, we know that that analysis is very limited; in general, the government will want to use
multiple tools to achieve each objective, and there will have to be extensive coordination among
those tasked with advancing different objectives.

Then, little attention was paid to governance. Now, we realize that governance problems, in both
the public and private sector, are critical.

Then, we thought that good public governance could be ensured simply by instituting
transparency and the appropriate set of checks and balances within the government. Now, we realize
that, while these are necessary, they are far from sufficient: the problems of governance are
societal. Societies with excessive inequality are prone to have governance problems, as the rich

abuse their power to enrich themselves at the expense of the rest, creating a ‘rule of law’ that
serves themselves well, but does not adequately protect ordinary citizens.

We have seen that development is possible—beyond what was imaginable half a century ago.
And in virtually all of the cases of success, government has played a central part. But so too have
markets.

One might be tempted to say that we have entered the era of pragmatism: ideologies that have
pushed one or the other extreme have failed. But I would suggest we know more than this. The
theories that have been developed in the last thirty years and the analyses of the successes and
failures of the dramatic historical experiences of recent decades provide considerable insights
into development, into what policies are more likely to promote shared growth and development
and which are likely to retard it. Of course, there is still much that we do not know, especially in
some of the burgeoning sub-disciplines to which I have called attention in this paper. And we
need to remember: development economists, especially at the international economic
institutions, displayed more confidence in their models than they deserved. This should instil in
us a sense of humility and deference. Development is far more complicated than those who
pushed the Washington Consensus policies thought a quarter of a century ago.

UNU-WIDER has been at the centre of this new understanding, and I am pleased to be part of
celebrating its thirty years.

References

Alesina, A., and E. Spolare (1997). ‘On the Number and Size of Nations’. Quarterly Journal of
Economics, 112(4): 1027–56.

Allen, F., and D. Gale (2000). ‘Financial Contagion’. Journal of Political Economy, 108(1): 1–33.

Arndt, C., A. McKay, and F. Tarp (2016). Growth and Poverty in Sub-Saharan Africa. Oxford:
Oxford University Press.

Arnott, R.J., and J.E. Stiglitz (1979). ‘Aggregate Land Rents, Expenditure on Public Goods and
Optimal City Size’. Quarterly Journal of Economics, 93(4) November: 471–500.

Arnott, R.J., and J.E. Stiglitz (1988). ‘The Basic Analytics of Moral Hazard’. Scandinavian Journal of
Economics, 90(3) 1988: 383–413. Reprinted in Selected Works of Joseph E. Stiglitz, Volume I:
Information and Economic Analysis. Oxford: Oxford University Press 2009, pp. 417–43.

Arrow, K. (1962a). ‘Economic Welfare and the Allocation of Resources of Invention’. In
R. Nelson (ed.), The Rate and Direction of Inventive Activity: Economic and Social Factors.
Princeton, NJ: Princeton University Press.

Arrow, K. (1962b). ‘The Economic Implications of Learning by Doing’. The Review of Economic
Studies, 29(3): 155–73.

Atkinson, A.B., and J.E. Stiglitz (1980). Lectures on Public Economics. New York and London:
McGraw-Hill Book Company (reissued 2015).

Banerjee, A., and E. Duflo (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global
Poverty. New York: Public Affairs.

Barton, D., Y. Chen, and A. Jin (2013). ‘Mapping China’s Middle Class’. McKinsey Quarterly, June.
Available at:

http://www.jstor.org.arugula.cc.columbia.edu:2048/view/00346527/di990586/99p01016/0?currentResult=00346527%2bdi990586%2b99p01016%2b0%2c00&searchUrl=http%3A%2F%2Fwww.jstor.org%2Fsearch%2FAdvancedResults%3Fhp%3D25%26si%3D1%26q0%3Darrow%26f0%3Dau%26c0%3DAND%26wc%3Don%26sd%3D%26ed%3D%26la%3D%26ic%3D00346527%26ic%3D00346527%26node.Economics%3D1%26node.Business%3D1

http://www.jstor.org.arugula.cc.columbia.edu:2048/browse/00346527/di990586

http://www.mckinsey.com/insights/consumer_and_retail/mapping_chinas_middle_class
(accessed on 9 September 2015).

Battiston, S., G. Caldarelli, C.-P. Georg, R. May, and J.E. Stiglitz (2013). ‘Complex Derivatives’.
Nature Physics, 9(3): 123–25.

Battiston, S., D. Delli Gatti, M. Gallegati, B. Greenwald, and J.E. Stiglitz (2012a). ‘Liaisons
Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk’. Journal of Economic
Dynamics and Control, 36: 1121–41.

Battiston, S., D. Delli Gatti, M. Gallegati, B. Greenwald, and J.E. Stiglitz (2012b). ‘Default
Cascades: When Does Risk Diversification Increase Stability?’. Journal of Financial Stability,
8(3) (2012): 138–149.

Blanchard, O.J., D. Romer, M. Spence, and J.E. Stiglitz (eds) (2012). In the Wake of the Crisis:
Leading Economists Reassess Policy. Cambridge, MA: MIT Press.

Charlton, A.H., and J.E. Stiglitz (2005a). ‘A Development-Friendly Prioritisation of Doha Round
Proposals’. The World Economy, 28(3): 293–312.

Charlton, A.H., and J.E. Stiglitz (2005b). Fair Trade for All. New York: Oxford University Press.

Charlton, A.H., and J.E. Stiglitz (2006a). ‘Aid for Trade’. International Journal of Development Issues,
5(2): 1–41. (Reprint of Paper Prepared for Commonwealth Secretariat.)

Charlton, A.H., and J.E. Stiglitz (2006b). ‘Aid for Trade’. The Swiss Review of International Economic
Relations, 61(2), June. (Abridged Version of Paper Prepared for Commonwealth Secretariat).

Charlton, A.H., and J.E. Stiglitz (2008). ‘Aid for Trade’. Keynote Address in F. Bourguignon and
B. Pleskovic (eds), Annual World Bank Conference on Development Economics 2007, Rethinking
Infrastructure for Development. Washington, DC: World Bank, pp. 29-

Cimoli, M., G. Dosi, K.E. Maskus, R.L. Okediji, J.H. Reichman, and J.E. Stiglitz (eds.) (2014).
Intellectual Property Rights: Legal and Economic Challenges for Development. Oxford and New York:
Oxford University Press.

Dabla-Norris, E., K. Kochhar, N. Suphaphiphat, F. Ricka, and E. Tsounta (2015). ‘Causes and
Consequences of Income Inequality: A Global Perspective’. IMF Staff Discussion Note
15/13, June. Washington, DC: International Monetary Fund.

Delli Gatti, D., M. Gallegati, B.C. Greenwald, A. Russo, and J.E. Stiglitz (2012a). ‘Sectoral
Imbalances and Long Run Crises’. In F. Allen, M. Aoki, J.-P. Fitoussi, N. Kiyotaki,
R. Gordon, and J.E. Stiglitz (eds), The Global Macro Economy and Finance. IEA Conference
Volume No. 150-III. Basingstoke, UK and New York: Palgrave pp. 61–97.

Delli Gatti, D., M. Gallegati, B.C. Greenwald, A. Russo, and J.E. Stiglitz (2012b). ‘Mobility
Constraints, Productivity Trends, and Extended Crises’. Journal of Economic Behavior &
Organization, 83(3): 375–93.

Diamond, J.M. (2005). Guns, Germs, and Steel: The Fates of Human Societies. New York: W.W.
Norton.

Dosi, G., and J.E. Stiglitz (2014). ‘The Role of Intellectual Property Rights in the Development
Process, with Some Lessons from Developed Countries: An Introduction’. In M. Cimoli, G.
Dosi, K.E. Maskus, R.L. Okediji, J.H. Reichman, and J. E. Stiglitz (eds), Intellectual Property
Rights: Legal and Economic Challenges for Development. Oxford and New York: Oxford
University Press, pp. 1–53.

Easterly, W. (2001). The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the
Tropics. Cambridge, MA: MIT Press.

http://www.nber.org/people/stefano_battiston

http://www.nber.org/people/domenico.delligatti

http://www.nber.org/people/gallegati

http://www.nber.org/people/bruce_greenwald

http://www.nber.org/people/joseph_stiglitz

http://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/2012_Liaisons_Dang

http://www.nber.org/people/stefano_battiston

http://www.nber.org/people/domenico.delligatti

http://www.nber.org/people/gallegati

http://www.nber.org/people/bruce_greenwald

http://www.nber.org/people/joseph_stiglitz

Ellerman, D., and J.E. Stiglitz (2000). ‘New Bridges across the Chasm: Macro- and Micro-
Strategies for Russia and other Transitional Economies’. Zagreb International Review of
Economics and Business, 3(1): 41–72.

Ellerman, D., and J.E. Stiglitz (2001). ‘Not Poles Apart: “Whither Reform?” and “Whence
Reform?”’. The Journal of Policy Reform, 4(4): 325–38.

Feigenberg, B., E.M. Field, and R. Pande (2010). ‘Building Social Capital through Microfinance’.
HKS Faculty Research Working Paper Series, RWP10-019. Cambridge, MA: John F.
Kennedy School of Government, Harvard University.

Florini, A. (ed.) (2007). The Right to Know: Transparency for an Open World. New York: Columbia
University Press.

Godoy, S., and J.E. Stiglitz (2007). ‘Growth, Initial Conditions, Law and Speed of Privatization
in Transition Countries: 11 Years Later’. In S. Estrin, G.W. Kolodko, and M Uvalic (eds),
Transition and Beyond. Basingstoke, UK: Palgrave Macmillian, pp. 89–117.

Greenwald, B.C., and J.E. Stiglitz (1986). ‘Externalities in Economies with Imperfect
Information and Incomplete Markets’. Quarterly Journal of Economics, 101(2): 229–64.

Greenwald, B.C., and J.E. Stiglitz (2003). Towards a New Paradigm in Monetary Economics.
Cambridge, UK: Cambridge University Press.

Greenwald, B.C., and J.E. Stiglitz (2014a). ‘Learning and Industrial Policy: Implications for
Africa’. In J.E. Stiglitz, J.Y. Lin, and E. Patel (eds), The Industrial Policy Revolution II: Africa in
the 21

st
Century. Basingstoke, UK and New York: Palgrave Macmillan, pp. 25–29.

Greenwald, B.C., and J.E. Stiglitz (2014b). ‘Industrial Policies, the Creation of a Learning Society,
and Economic Development’. In J.E. Stiglitz and J.Y. Lin (eds), The Industrial Policy Revolution
I: The Role of Government Beyond Ideology. Basingstoke, UK and New York: Palgrave Macmillan,
pp. 43–71.

Griffith-Jones, S., J.A. Ocampo, and J.E. Stiglitz (eds) (2010). Time for a Visible Hand: Lessons from
the 2008 World Financial Crisis. Oxford: Oxford University Press.

Haldar, A., and J.E. Stiglitz (2013a). ‘Analyzing Legal Formality and Informality: Lessons from
Land-Titling and Microfinance Programs’. In D. Kennedy and J. Stiglitz (eds), Law and
Economic Development with Chinese Characteristics: Institutions for Promoting Development in the
Twenty-First Century. Oxford and New York: Oxford University Press, pp.112–48.

Haldar, A., and J.E. Stiglitz (2013b). The Indian Microfinance Crisis: The Role of Social Capital, the Shift
to For-Profit Lending, and Implications for Microfinance Theory and Practice. New York: Columbia
University.

Hoff, K., and J.E. Stiglitz (2001). ‘Modern Economic Theory and Development’. In G. Meier
and J. Stiglitz (eds), Frontiers of Development Economics: The Future in Perspective. Oxford: Oxford
University Press, pp. 389–459.

Hoff, K., and J.E. Stiglitz (2004). ‘After the Big Bang? Obstacles to the Emergence of the Rule
of Law in Post-Communist Societies’. American Economic Review, 94(3): 753–63.

Hoff, K., and J.E. Stiglitz (2007). ‘Exiting a Lawless State’. Economic Journal, 118(531): 1474–97.

Hoff, K., and J.E. Stiglitz (2010a). ‘Equilibrium Fictions: A Cognitive Approach to Societal
Rigidity’. American Economic Review, 100(2): 141–46. (Shortened version of Hoff and Stiglitz,
2010b).

Hoff, K., and J.E. Stiglitz (2010b). ‘Equilibrium Fictions: A Cognitive Approach to Societal
Rigidity’. Policy Research Working Paper 5219 (same title), The World Bank Development

Research Group, February 2010. Available at:
http://elibrary.worldbank.org/docserver/download/5219 ?expires=1304012730&id=id
&accname=guest&checksum=5428C2B3013CF8ECBB54953BAC3F328C.

Hoff, K., and J.E. Stiglitz (2016). ‘Striving for Balance in Economics: Towards a Theory of the
Social Determination of Behavior’. World Bank Policy Research Working Paper WPS 7537,
January and NBER Working Paper 21823, December 2015, and forthcoming in Journal of
Economic Behavior and Organization and NBER.

Humphreys, M., J. Sachs, and J.E. Stiglitz (eds) (2007). Escaping the Resource Curse. New York:
Columbia University Press.

International Monetary Fund (2012). ‘The Liberalization and Management of Capital Flows: An
Institutional View’. IMF Policy Paper, November 14. Available at:
http://www.imf.org/external/np/pp/eng/2012/111412 (accessed on 4 September
2015).

Jeanne, O., and A. Korinek (2013). ‘Macroprudential Regulation Versus Mopping Up after the
Crash’. NBER Working Paper 18675, January. Cambridge, MA: NBER.

Kaldor, M., and J.E. Stiglitz (eds) (2013). The Quest for Security: Protection without Protectionism and the
Challenge of Global Governance. New York: Columbia University Press.

Kennedy, D., and J.E. Stiglitz (eds) (2013). Law and Economic Development with Chinese Characteristics:
Institutions for the 21st Century. Oxford and New York: Oxford University Press.

Korinek, A. (2012). Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses.
Maryland: University of Maryland Mimeo.

Kuznets, S. (1955). ‘Economic Growth and Income Inequality’. The American Economic Review,
45(1): 1–28.

Lange, O., and F.M. Taylor (1948). On the Economic Theory of Socialism. Minneapolis: The
University of Minnesota Press.

Lin, J.Y. (2011). ‘New Structural Economics: A Framework for Rethinking Development’. World
Bank Research Observer, 26(2): 193–221.

Lin, J.Y. (2012a). New Structural Economics: A Framework for Rethinking Development and Policy.
Washington, DC: World Bank.

Lin, J.Y. (2012b). ‘From Flying Geese to Leading Dragons: New Opportunities and Strategies for
Structural Transformation in Developing Countries’. Global Policy, 3(4): 397–409.

Maddison, A. (2005). ‘Measuring and Interpreting World Economic Performance 1500–2001’.
Review of Income and Wealth, 51(1): 1–35.

McClintick, D. (2006). ‘How Harvard Lost Russia’. Institutional Investor Magazine, 27 February.

Milanovic, B. (2016). Global Inequality: A New Approach for the Age of Globalization. Cambridge MA:
Harvard University Press.

Murphy, K.M., A. Shleifer, and R.W. Vishny (1989). ‘Industrialization and the Big Push’. The
Journal of Political Economy, 97(5): 1003–26.

Myrdal, G. (1968). Asian Drama: An Inquiry into the Poverty of Nations. New York: Pantheon.

Newbery, D., and J.E. Stiglitz (1984). ‘Pareto Inferior Trade’. Review of Economic Studies, 51(1)
January: 1–12.

Noman, A., and J.E. Stiglitz (2012a). ‘African Development Prospects and Possibilities’. In E.
Aryeetey, S. Devarajan, S. Kanbur, and L. Kasekende (eds), The Oxford Companion to the
Economics of Africa. Oxford: Oxford University Press, pp. 33–40.

Noman, A., and J.E. Stiglitz (2012b). ‘Strategies for African Development’. In A. Noman, K.
Botchwey, H. Stein, and J.E. Stiglitz (eds), Good Growth and Governance for Africa: Rethinking
Development Strategies. Oxford and New York: Oxford University Press, pp. 3–47.

Noman, A., and J.E. Stiglitz (2015a). ‘Economics and Policy: Some Lessons from Africa’s
Experience’. In C. Monga and J.Y. Lin (eds), The Oxford Handbook of Africa and Economics,
Volume II: Policies and Practices. Oxford and New York: Oxford University Press, pp. 830–48.

Noman, A., and J.E. Stiglitz (eds) (2015b). Industrial Policy and Economic Transformation in Africa.
New York: Columbia University Press.

Noman, A., K. Botchwey, H. Stein, and J.E. Stiglitz (eds) (2012). Good Growth and Governance for
Africa: Rethinking Development Strategies. Oxford and New York: Oxford University Press.

Oates, W. (1999). ‘An Essay on Fiscal Federalism’. Journal of Economic Literature, 37(3): 1120–49.

OECD (2015). Education at a Glance 2015: OECD Indicators. Paris: OECD Publishing.

Okun, A. (1975). Equality and Efficiency: The Big Tradeoff. Washington, DC: Brookings Institution.

Orszag, P., and J.E. Stiglitz (2001). ‘Rethinking Pension Reform: Ten Myths about Social
Security Systems’. In R. Holman and J. Stiglitz (eds), New Ideas About Old Age Security.
Washington, DC: World Bank, pp. 17–56.

Ostry, J.D., A. Berg, and C.G. Tsangarides (2014). ‘Redistribution, Inequality, and Growth’. IMF
Staff Discussion Note, February. Washington, DC: International Monetary Fund.

Persson, T., G. Roland, and G. Tabellini (2000). ‘Comparative Politics and Public Finance’.
Journal of Political Economy, 108(6): 1121–61.

Phillipson, N.T. (2010). Adam Smith: An Enlightened Life. New Haven, CT: Yale University Press.

Piketty, T. (2014). Capital in the Twenty-First Century. Chicago, IL: Harvard University Press.

Radner, R., and J.E. Stiglitz (1984). ‘A Nonconcavity in the Value of Information’. In M. Boyer
and R. Khilstrom (eds), Bayesian Models in Economic Theory. Amsterdam: Elsevier Science
Publications, pp. 33–52.

Rashid, H. (2013). ‘Does Financial Market Liberalization Promote Financial Development?:
Evidence from Sub-Saharan Africa’. In J.E. Stiglitz, J.Y. Lin, and P. Ebrahim Patel (eds), The
Industrial Policy Revolution II: Africa in the 21st Century. The Industrial Policy Revolution II.
Basingstoke, UK and New York: Palgrave Macmillan, pp. 321–49.

Sachs, J.D. (2000). ‘Tropical Underdevelopment’. Center for International Development
Working Paper 57, Harvard University. Cambridge, MA: Harvard Kennedy School, Harvard
University. Available at: http://www.cid.harvard.edu/cidwp/057.htm (accessed on 4
September 2015).

Samuelson, P. (1947). Foundations of Economic Analysis. Cambridge, MA and London: Harvard
University Press.

Samuelson, P. (1954). ‘The Pure Theory of Public Expenditure’. Review of Economics and
Statistics, 36(4): 387–89.

Serra, N., and J.E. Stiglitz (eds) (2008). The Washington Consensus Reconsidered: Towards a New Global
Governance. Oxford and New York: Oxford University Press.

http://link.springer.com/search?facet-creator=%22Joseph+E.+Stiglitz%22

http://link.springer.com/search?facet-creator=%22Justin+Lin+Yifu%22

http://link.springer.com/search?facet-creator=%22Ebrahim+Patel%22

Shaffer, B., and T. Ziyadov (eds) (2011). Beyond the Resource Curse. Philadelphia: University of
Pennsylvania Press.

Shleifer, A., and D. Treisman (2004). ‘A Normal Country’. Foreign Affairs, 83: 20–38.

Simon, H.A. (1991). ‘Organizations and Markets’. Journal of Economic Perspectives, 5(2): 25–44.

Starrett, D.A. (1972). ‘Fundamental Nonconvexities in the Theory of Externalities’. Journal of
Economic Theory, 4(2): 180–99.

Stiglitz, J.E. (1972). ‘Taxation, Risk Taking, and the Allocation of Investment in a Competitive
Economy’. In M. Jensen (ed.), Studies in the Theory of Capital Markets. New York: Praeger, pp.
294–361. (Proceedings of a Conference at the University of Rochester, August 1969.)

Stiglitz, J.E. (1974). ‘Theories of Discrimination and Economic Policy’. In G. von Furstenberg,
A.H. Horowitz, and B. Harrison (eds), Patterns of Racial Discrimination. Lexington, MA: D.C.
Heath and Company (Lexington Books), pp. 5–26.

Stiglitz, J.E. (1977). ‘Theory of Local Public Goods’. In M.S. Feldstein and R.P. Inman (eds), The
Economics of Public Services. London: MacMillan Press, pp. 274–333. (Paper presented to IEA
Conference, Turin, 1974.)

Stiglitz, J.E. (1980). ‘Information, Planning and Incentives’. Presented at the CSCCRP Sino-
American Conference on Alternative Development Strategies in Wingspread, Racine, WI,
November. (Chinese Edition Published 1982, Reprinted in Chinese Edition of Collected
Papers.)

Stiglitz, J.E. (1983a). ‘The Theory of Local Public Goods Twenty-Five Years after Tiebout: A
Perspective’. In G.R. Zodrow (ed.), Local Provision of Public Services: The Tiebout Model After
Twenty-Five Years. New York: Academic Press, pp. 17–53.

Stiglitz, J.E. (1983b). ‘Public Goods in Open Economies with Heterogeneous Individuals’. In
J.F. Thisse and H.G. Zoller (eds), Locational Analysis of Public Facilities. Amsterdam: North-
Holland, pp. 55–78.

Stiglitz, J.E. (1987). ‘On the Microeconomics of Technical Progress’. In J.M. Katz (ed.), Technology
Generation in Latin American Manufacturing Industries. New York: St. Martin’s Press, pp. 56–77.
(Presented to IDB-CEPAL Meetings, Buenos Aires, November 1978.)

Stiglitz, J.E. (1989). ‘On the Economic Role of the State’. In A. Heertje (ed.), The Economic Role of
the State. Amsterdam: Bank Insinger de Beaufort NV.

Stiglitz, J.E. (1990). ‘Peer Monitoring and Credit Markets’. World Bank Economic Review, 4(3): 351–
66.

Stiglitz, J.E. (1991a). ‘The Economic Role of the State: Efficiency and Effectiveness’. In T.P.
Hardiman and M. Mulreany (eds.), Efficiency and Effectiveness in the Public Domain. The Economic
Role of the State. Dublin: Institute of Public Administration, pp. 37–59.

Stiglitz, J.E. (1991b). ‘Development Strategies: The Roles of the State and the Private Sector’. In
Proceedings of the World Bank’s Annual Conference on Development Economics 1990. Washington,
DC: World Bank, pp. 430–35.

Stiglitz, J.E. (1991c). ‘Some Theoretical Aspects of the Privatization: Applications to Eastern
Europe’. Revista di Politica Economica, December 1991: 179–204. IPR-USAID Working Paper,
September 1991. Also in M. Baldassarri, L. Paganetto, and E.S. Phelps (eds) (1993),
Privatization Processes in Eastern Europe. New York: St Martin’s Press.

Stiglitz, J.E. (1993a). ‘Perspectives on the Role of Government Risk-Bearing within the Financial
Sector’. In M. Sniderman (ed.), Government Risk-Bearing. Norwell, MA: Kluwer Academic
Publishers, pp. 109–30.

Stiglitz, J.E. (1993b). ‘The Role of the State in Financial Markets’. In Proceedings of the World Bank
Annual Conference on Development Economics 1992. Washington, DC: World Bank, pp. 19–52.

Stiglitz, J.E. (1993c). ‘Comments on “Toward a Counter-Counter-Revolution in Development
Theory”’. In Proceedings of the World Bank’s Annual Conference on Development Economics 1992.
Washington, DC: World Bank, pp. 39–49.

Stiglitz, J.E. (1994). Whither Socialism? Cambridge, MA: MIT Press.

Stiglitz, J.E. (1995). ‘The Theory of International Public Goods and the Architecture of
International Organizations’. Background Paper 7, Third Meeting, High Level Group on
Development Strategy and Management of the Market Economy, UNU-WIDER, Helsinki,
Finland, 8–10 July.

Stiglitz, J.E. (1996). ‘Some Lessons from the East Asian Miracle’. World Bank Research Observer,
11(2): 151–77.

Stiglitz, J.E. (1997a). ‘The Role of Government in the Economies of Developing Countries’. In
E. Malinvaud and A.K. Sen (eds), Development Strategy and the Management of the Market
Economy. Oxford: Clarendon Press, pp. 61–109.

Stiglitz, J.E. (1997b). ‘The Role of Government in Economic Development (Keynote Address)’.
In M. Bruno and B. Pleskovic (eds), Annual World Bank Conference on Development Economics
1996. Washington, DC: World Bank, pp. 11–23.

Stiglitz, J.E. (1997c). ‘The Role of Government in the Economies of Developing Countries’. In
E. Malinvaud and A.K. Sen (eds), Development Strategy and the Management of the Market
Economy. Oxford: Clarendon Press, pp. 61–109.

Stiglitz, J.E. (1998a). ‘More Instruments and Broader Goals: Moving Toward the Post-
Washington Consensus’. In G. Kochendorfer-Lucius and B. Pleskovic (eds), Development
Issues in the 21

st
Century. Berlin: German Foundation for International Development, pp. 11–

39. Also Chapter 1 in H.-J. Chang (ed.) (2001), The Rebel Within. London: Wimbledon
Publishing Company, pp. 17–56. (Originally Presented as the 1998 WIDER Annual Lecture,
Helsinki, January 1998; also Keynote Address at Villa Borsig Winter Workshop, February
1998.)

Stiglitz, J.E. (1998b). ‘Toward a New Paradigm for Development: Strategies, Policies, and
Processes’. 1998 Prebisch Lecture at UNCTAD, Geneva, October 19, 1998.

Stiglitz, J.E. (1998c). ‘Development Thinking at the Millennium’. In Proceedings from the Annual
Bank Conference on Development Economics 2000. Washington, DC: World Bank, 2001, pp. 13–
38.

Stiglitz, J.E. (1998d). ‘An Agenda for Development in the Twenty-First Century’. In J.E. Stiglitz
and B. Pleskovic (eds), Annual World Bank Conference on Development Economics 1997.
Washington, DC: World Bank, pp. 17–31.

Stiglitz, J.E. (1998e). ‘Inequality and Growth: Implications for Public Finance and Lessons from
Experience in the US’. In N. Birdsall, C. Graham, and R.H. Sabot (eds), Beyond Tradeoffs:
Market Reform and Equitable Growth in Latin America. Washington, DC: Inter-American
Development Bank and Brookings Institution Press, pp. 305–19

https://www.wider.unu.edu/node/3646

Stiglitz, J.E. (2000a). ‘Whither Reform? Ten Years of Transition’. In B. Pleskovic and J.E. Stiglitz
(eds), Annual World Bank Conference on Economic Development. Washington, DC: World Bank,
pp. 27–56.

Stiglitz, J.E. (2000b). ‘Quis custodiet ipsos custodes? Corporate Governance Failures in the
Transition’. In P.-A. Muet and J.E. Stiglitz (eds), Governance, Equity and Global Markets,
Proceedings from the Annual Bank Conference on Development Economics in Europe, June 1999. Paris:
Conseil d’Analyse Economique, pp. 51–84.

Stiglitz, J.E. (2001a). ‘Participation and Development: Perspectives from the Comprehensive
Development Paradigm’. In F. Iqbal and J.-I You (eds), Democracy, Market Economics &
Development: An Asian Perspective. Washington, DC: World Bank, pp. 49–72.

Stiglitz, J.E. (2001b). ‘Development Theory at a Crossroads’. In J.-F. Rischard et al. (eds),
Proceedings from the Annual Bank Conference on Development Economics in Europe, June 2000. Paris:
Conseil d’Analyse Economique, pp. 65-74.

Stiglitz, J.E. (2002a). Globalization and Its Discontents. New York: W.W. Norton.

Stiglitz, J.E. (2002b). ‘Transparency in Government’. In R. Islam (ed.), The Right to Tell: The Role of
Mass Media in Economic Development. WBI Development Studies, Washington, DC: World
Bank Institute, pp. 27–44.

Stiglitz, J.E. (2003). ‘On Liberty, the Right to Know, and Public Discourse: The Role of
Transparency in Public Life’. In M.J. Gibney (ed.), Globalizing Rights: The Oxford Amnesty
Lectures 1999. Oxford: Oxford University Press, pp.115–56.

Stiglitz, J.E. (2005). ‘The CDF’s Intellectual Structure’. In R. Kagia (ed.), Balancing the Development
Agenda: The Transformation of the World Bank under James D. Wolfensohn, 1995–2005.
Washington, DC: World Bank Press, pp. 150–51.

Stiglitz, J.E. (2006a). Making Globalization Work. New York: W.W. Norton.

Stiglitz, J.E. (2006b). ‘Samuelson and the Factor Bias of Technological Change’. In M. Szenberg,
L. Ramrattan, and A. Gottesman (eds), Samuelsonian Economics and the Twenty-First Century.
New York: Oxford University Press, pp. 235–51.

Stiglitz, J.E. (2006c). ‘Global Public Goods and Global Finance: Does Global Governance
Ensure that the Global Public Interest is Served?’. In J.-P. Touffut (ed.), Advancing Public
Goods. Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 149–64

Stiglitz, J.E. (2008a). ‘Is there a Post-Washington Consensus Consensus?’. In N. Serra and J.E.
Stiglitz (eds), The Washington Consensus Reconsidered: Towards a New Global Governance. New
York: Oxford University Press, pp. 41–56.

Stiglitz, J.E. (2008b). ‘Capital Market Liberalization, Globalization, and the IMF’. In J.E. Stiglitz
and J.A. Ocampo (eds), Capital Market Liberalization and Development. New York: Oxford
University Press, pp.76–100.

Stiglitz, J.E. (2008c). ‘The Economic Foundations of Intellectual Property’. Sixth Annual Frey
Lecture in Intellectual Property, Duke University, February 16, 2007. Duke Law Journal,
57(6): 1693–1724.

Stiglitz, J.E. (2010a). ‘Contagion, Liberalization, and the Optimal Structure of Globalization’.
Journal of Globalization and Development, 1(2), Article 2.

Stiglitz, J.E. (2010b). ‘Risk and Global Economic Architecture: Why Full Financial Integration
May be Undesirable’. American Economic Review, 100(2): 388–92.

Stiglitz, J.E. (2011a). ‘Rethinking Development Economics’. The World Bank Research Observer,
26(2): 230–36.

Stiglitz, J.E. (2011b). ‘Rethinking Macroeconomics: What Failed and How to Repair It’. Journal of
the European Economic Association, 9(4): 591–645.

Stiglitz, J.E. (2012a). The Price of Inequality: How Today’s Divided Society Endangers Our Future. New
York: W.W. Norton.

Stiglitz, J.E. (2012b). ‘Macroeconomic Fluctuations, Inequality, and Human Development’.
Journal of Human Development and Capabilities, 13(1): 31–58. Reprinted in Macroeconomics and
Human Development, Deepak Nayyar (ed.), Taylor and Francis, 2013.

Stiglitz, J.E. (2013a). ‘Stable Growth in an Era of Crises: Learning from Economic Theory and
History’. Ekonomi-tek, 2(1): 1–38. (Originally Delivered as Keynote Lecture to the Turkish
Economic Association, Izmir, November 2012.)

Stiglitz, J.E. (2013b). ‘Social Protection without Protectionism’. In M. Kaldor and J.E. Stiglitz,
(eds), The Quest for Security: Protection without Protectionism and the Challenge of Global Governance.
New York: Columbia University Press, pp. 24–47.

Stiglitz, J.E. (2014a). ‘The Lessons of the North Atlantic Crisis for Economic Theory and Policy’.
In G. Akerlof, O. Blanchard, D. Romer, and J.E. Stiglitz (eds), What Have We Learned?
Macroeconomic Policy after the Crisis. Cambridge, MA and London: MIT Press, pp. 335–47.

Stiglitz, J.E. (2014b). ‘Institutional Design for China’s Innovation System’. In J.E. Stiglitz and
D. Kennedy (eds), Law and Economic Development with Chinese Characteristics: Institutions for the
21st Century. Oxford and New York: Oxford University Press, pp. 247–77

Stiglitz, J.E. (2014c). ‘Unemployment and Innovation’. NBER Working Paper 20670, November.
Cambridge, MA: NBER.

Stiglitz, J.E. (2015a). ‘Leaders and Followers: Perspectives on the Nordic Model and the
Economics of Innovation’. Journal of Public Economics, 127(2015): 3–16.

Stiglitz, J.E. (2015b). ‘Devolution, Independence, and the Optimal Provision of Public Goods’.
In M. Fosgerau and E. Verhoef (eds), Economics of Transportation. New York: Columbia
University Press.

Stiglitz, J.E. (2015c). The Great Divide: Unequal Societies and What We Can Do About Them. New
York: W.W. Norton.

Stiglitz, J.E. (2015d). ‘The Measurement of Wealth: Recessions, Sustainability and Inequality’. To
be published in Contemporary Issues in Macroeconomics: Lessons from The Crisis and
Beyond—International Economic Association Series, J.E. Stiglitz and M. Guzman (eds),
Basingstoke, UK and New York: Palgrave Macmillan and NBER Working Paper 21327,
July 2015. (Paper presented at a special session of the International Economic Association
World Congress, Dead Sea, Jordan, June 2014 sponsored by the OECD.)

Stiglitz, J.E. (2016, forthcoming). The Euro: How a Common Currency Threatens the Future of Europe.
New York: W.W. Norton

Stiglitz, J.E., N. Abernathy, A. Hersh, S. Holmberg, and M. Konczal (2015). Rewriting the Rules of
the American Economy. A Roosevelt Institute Book. New York: W.W. Norton.

Stiglitz, J.E., and B.C. Greenwald (2014). Creating a Learning Society: A New Approach to Growth,
Development, and Social Progress. New York: Columbia University Press.

Stiglitz, J.E. and J.Y. Lin (eds) (2014). The Industrial Policy Revolution I: The Role of Government beyond
Ideology. Basingstoke, UK and New York: Palgrave Macmillan.

Stiglitz, J.E., J.Y. Lin, and E. Patel, (eds) (2014). The Industrial Policy Revolution II: Africa in the 21
st

Century. Basingstoke, UK and New York: Palgrave Macmillan.

Stiglitz, J.E., A. Sen, and J. Fitoussi (2010). Mismeasuring Our Lives: Why GDP Doesn’t Add Up.
New York: The New Press.

Stiglitz, J.E., and M. Uy (1996). ‘Financial Markets, Public Policy, and the East Asian Miracle’.
World Bank Research Observer, 11(2): 249–76.

Tiebout, C.M. (1956). ‘A Pure Theory of Local Expenditures’. The Journal of Political Economy,
64(5): 416–24.

Tobin, J. (1970). ‘On Limiting the Domain of Inequality’. Journal of Law and Economics, 13(2): 263–
77.

Williamson, J. (1990). ‘What Washington Means by Policy Reform’. In J. Williamson (ed.), Latin
American Adjustment: How Much Has Happened? Washington, DC: Institute for International
Economics, pp. 7.

Williamson, J. (2008). ‘A Short History of the Washington Consensus’. In N. Serra and J.E.
Stiglitz (eds), The Washington Consensus Reconsidered: Towards a New Global Governance. Oxford
and New York: Oxford University Press, pp. 14–30.

Wolfensohn, J. (1999). ‘A Proposal for a Comprehensive Development Framework’. World
Bank Discussion Paper. Available at:
http://web.worldbank.org/archive/website01013/WEB/0__CO-87.HTM (accessed on 4
September 2015).

World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy. World Bank Policy
Research Report. Oxford and New York: Oxford University Press.

World Bank (1999). World Development Report 1998–99: Knowledge for Development. Oxford and New
York: Oxford University Press.

World Bank (2015). World Development Report 2015: Mind, Society, and Behavior. Washington, DC:
World Bank.

Yunus, M. (2011). ‘Sacrificing Microcredit for Megaprofits’. The New York Times, 14 January.

Governance as a Global Development Goal?
Setting, Measuring and Monitoring the Post-
2015 Development Agenda

David Hulme, Antonio Savoia and Kunal Sen
Institute for Development Policy and Management, University of Manchester

Abstract
The increasing realisation that governance quality is a fundamental element of long-run development has led to its con-
sideration as a desirable development goal in its own right. To contribute to such a process, this article provides a
framework to set, measure and monitor governance goals in the post-2015 development agenda. First, we assess
whether existing cross-national measures on governance quality can be exploited to measure and monitor aspects of
legal, bureaucratic and administrative quality. Such a ‘quick fix’ approach to measuring governance quality is fraught
with challenges. The current practice of measurement is still subject to the short country coverage of most available
measures, issues of comparability and legitimacy, as well as methodological shortcomings. Second, we argue that, in
the long run, measuring and monitoring governance quality may require reconceptualising ‘good governance’ and
designing internationally shared measures that are routinely provided by national statistical offices (but, international
groups should also continue to make their independent measures). Finally, we consider the different approaches to set-
ting governance goals, arguing in favour of a combination of national target setting and minimum standard with con-
tinuous improvement.

Policy Implications
• Short-term, the task of measuring and monitoring governance goals is quite challenging and one should be mind-

ful that existing indices are subject to short country coverage, issues of comparability and legitimacy, as well as
methodological shortcomings. Hence, the interpretation of changes in governance in the future may be challenged
both technically and politically.

• Longer-term, since the idea of ‘good governance’ can be highly controversial, one should reflect on which dimen-
sions and measures should be included. One approach is to consider the intrinsic value of good governance, which
would give precedence to measures capturing state-society relations and accountability. The alternative is consider-
ing the instrumental value of governance. In this case, the focus should be on state capacity; and measures of state
administrative and legal capability would be a desirable starting point.

• For setting governance goals, we recommend minimum global standards set for fixed dates, but all countries also
to pursue improved measures on an annual basis line of argument.

• Policy makers should be aware of the two main tasks involved in this exercise. Short-term, the setting of credible
international targets that can contribute to improved governance. Longer-term, the setting in motion of processes
that will create governance measurement as a routinised function in all national statistical offices (the creation of a
professional cadre, the setting of international standards for example).

Most scholars and policy makers would agree that the
design of rules and regulations, the effectiveness of poli-
cies and the competence of public bodies play a crucial
role in the functioning of economies. In short, gover-
nance matters. Since the early 1990s, an increasing
amount of research focused on the quality of governance
as a determinant of national income levels and economic
growth rates. Although its effects on other important
development outcomes – such as inequality, health and

education – have received less attention, the current
consensus is that ‘good governance’, or perhaps more
accurately ‘good enough governance’ (Grindle, 2004), is a
prerequisite for development (e.g., Baland, Moene and
Robinson, 2010, Cingolani et al., 2013).

The findings of this research have led to increasing
recognition of the importance of its role to the point of
considering governance a desirable global development
goal in its own right (see United Nations, 2013 and

Global Policy Volume 6 . Issue 2 . May 2015
85

R
esea

rch
A
rticle

section 2). This article seeks to contribute to this process
by exploring the possibility of setting and monitoring
governance goals for the post-2015 development
agenda. In order to do so, one must necessarily look also
at the possibility of routinely measuring governance
goals. Hence, our task requires assessing how, and how
well, existing databases and measures capture gover-
nance quality: which aspects they measure; what and
how robust their methodologies are. We examine the
trends for measures of legal, bureaucratic and administra-
tive quality, assessing to what extent such measures can
be used, in terms of both political acceptability and sta-
tistical desirability.

We will argue that the idea of ‘good governance’, as
often captured, can be a highly controversial one (for
example see Sundaram and Chowdhury, 2012) and risks
neglecting the centrality of context to effective institu-
tional reform (Andrews, 2013). Hence, existing measures,
while offering a quick solution for the post-2015 develop-
ment agenda, may not reflect a ‘politically shared’ notion
of governance quality. We also argue that we need to
think long term: how to develop a professional cadre,
setting international standards and getting national sta-
tistical offices engaged, so that governance measures
become part of a routinised, national statistics activity
producing internationally comparable data. This is long
term, but it is what the UN has specialised in, and had a
lot of success in, since 1950 (Ward, 2004). It would
ensure that the post-2030 development agenda has well
thought out and high-quality governance measures.

The article proceeds as follows: section 1 provides a
background discussion on the approaches and controver-
sies of governance quality measurement; section 2 exam-
ines the potential of available indicators to capture
governance goals, presenting some statistics; sections 3
and 4 discuss the possibility of monitoring and setting
governance goals in the post-2015 development agenda;
and section 5 concludes.

1. Measuring governance as a development
goal

This section provides the background discussion on exist-
ing approaches and controversies on measurement and
their implications for governance as a development goal.
This requires two building blocks. First, we need to
define the object of measurement and its dimensions.
Second, we must discuss the methodological issues and
the properties of governance measures.

Defining what to measure

The concept of governance is commonly viewed as elu-
sive or as ambiguous. According to the Oxford English
Dictionary, governance is: ‘The manner in which some-

thing is governed or regulated; method of management,
system of regulations’. Detailed discussions of its concep-
tual underpinnings often conclude that there is no
widely accepted definition that can be operationalised
(e.g., Bevir, 2011 and Holmberg et al., 2009). The World
Bank’s definition of governance as ‘the manner in which
power is exercised in the management of a country’s
economic and social resources for development’ (World
Bank, 1992, p. 1) is used extensively in the literature. In
practice, the analysis of governance has fitted a multiplic-
ity of dimensions: from the type and quality of political
institutions to the set of economic institutions and poli-
cies. In particular, political democracy is often considered
as part of (good) governance. In democracies, citizens
and parties enjoy substantial representation and execu-
tive power is subject to checks and balances. Such char-
acteristics may often be associated with the attainment
of economic and human development goals. However,
this article is not concerned with aspects of democracy
or political regimes, for two reasons. First, the role of
democracy is still controversial as, historically, develop-
mental states in Asia existed under authoritarian regimes
(e.g., Taiwan and South Korea). Indeed, even authoritarian
regimes differ so greatly that thinking that such a cate-
gory has analytical utility may be far-fetched. Whether
and how political regimes affect the quality of gover-
nance remains an open question (e.g., Mulligan et al.,
2004; Bardhan, 1999). Second, the analysis of political
democracy and political regimes relate to aspects of
access to power. It seems conceptually appropriate to
keep the issue of access to power separate from the one
on the exercise of power (Mazzuca, 2010).1 As Fukuyama
(2013) argues, ‘governance is about the performance of
agents in carrying out the wishes of principals, and not
about the goals that principals set’ (p. 350).

Hence, this paper adopts a definition of governance
that separates the quality of governance from the nature
of the political regime in the country in question. Under
this definition, governance is the effectiveness of rules, poli-
cies and the functioning of public bodies that affect the
lives of the members of a community. Even from such a
narrow starting point that focuses on the organisation of
the state and how effectively it executes policies and
programmes, identifying the objects of measurement is
not straightforward. Theories of development disagree
on which and how many dimensions of governance are
crucial to prosperity. The type of governance that pro-
motes it may vary according to the proposed mecha-
nisms through which institutions and policies affect
development outcomes: some emphasise the protection
of property rights (see Acemoglu and Robinson, 2012;
and Tabellini, 2005); others point to the role of the state
involvement in overcoming coordination failures (e.g.,
Bardhan, 2005); or of protecting specific economic sec-
tors, supporting technological innovation, providing infra-

David Hulme, Antonio Savoia and Kunal Sen
86

structure and engaging in human capital formation (e.g.,
Evans, 1995). Consequently, the concept of governance
must be mapped according to the functions one deems
key to development.

Based on the existing economics and political science
literature, one can differentiate between three conceptu-
ally separate dimensions of governance (as being under-
stood as the capacity of the state to implement rules
and policies effectively), that are seen as being crucial for
the achievement of inclusive development. These are:

• Bureaucratic and administrative systems – Whatever we
may maintain a state should do to foster development,
it needs a bureaucratic apparatus to design and imple-
ment policies. This dimension is central to all areas of
research on the state and development. Traditionally,
state capacity indicators focus on the competence and
ability of bureaucracy (e.g., Evans and Rauch, 1999;
Rauch and Evans, 2000), and generally include the abil-
ity of raising tax and spending the proceeds efficiently
on important public goods (Ottervik, 2013).

• Legal infrastructure – The capability of a legal frame-
work of enforcing contracts and property rights (i.e., a
judicial system for settling disputes, rule of law). The
consensus is that, at the very least, the state has to
provide such public goods, as they are ill-suited to
private provision (Besley and Persson, 2011; Lin and
Nugent,1995).

• Transparency and accountability – While there may be
disagreement on the appropriate nature of the state
in fostering economic development, there seems to
be increasing realisation on the importance of trans-
parency and accountability in shaping the legitimacy
of state institutions and the quality of governance.
Here, transparency and accountability is broadly
understood to be about the relationship between the
citizen and the state and the extent to which the
state is answerable for its own actions and inactions
(UNDP, 2013). Transparency and accountability are
seen as important elements of the effectiveness of
states in delivering essential services such as educa-
tion, health and infrastructure effectively to the poor
(World Bank, 2004; Rakjumar and Swaroop, 2008).

The transparency and accountability component of the
‘good governance’ agenda has been mostly clearly
reflected in the post-2015 development goal on gover-
nance in the high-level panel (HLP) report (United
Nations, 2013). As Table 1 illustrates, all five dimensions
of Goal 10: Ensuring Good Governance and Effective
Institutions, as formulated in the HLP report, address
transparency and accountability, in some degree. It is
noteworthy that bureaucratic capacity and legal infra-
structure do not seem to figure so clearly in the
post-2015 millennium development goals (MDG) goal on
governance, when there is a large body of evidence that
these dimensions of governance matter more for inclu-
sive development (Evans and Rauch, 1999; Besley and
Persson, 2011; Savoia and Sen, 2014).

Methodological issues

Empirical research on governance quality has designed
numerous and diverse measures: on the protection of
property rights; quality and performance of the bureau-
cracy; the administration of justice; and micro and mac-
roeconomic management.2 This section reviews the
methods and findings from such literature.

A popular classification divides governance indicators
between objective and subjective measures (e.g., see Wil-
liams and Siddiqui, 2008). Examples of measures con-
structed from ‘hard’ data often come from the state
capacity literature. Proxies can draw on economic vari-
ables, such as tax effort (e.g., Hendrix, 2010; Hanson and
Sigman, 2013), military expenditure (e.g., Hanson and Sig-
man, 2013) or even national income measures (Fearon
and Laitin, 2003). Others drew on infrastructure and pub-
lic sector variables, such as railroad or road density and
census administration (Centeno, 2002; Hanson and Sig-
man, 2013) or military personnel (Hendrix, 2010). A sec-
ond class of objective measures is rule-based, i.e.,
constructed by rating the existence and strength of cer-
tain formal (de jure) rules. Examples of rule-based mea-
sures of governance are those compiled by Global
Integrity such as whether a country has regulations
requiring an impartial, independent and fairly managed
civil service (administrative capacity), laws that require

Table 1. The UN High Level Panel’s illustrative goal for governance

Goal 10: ensure good governance and effective institutions

a) Provide free and universal legal identity, such as birth registrations
b) Ensure that people enjoy freedom of speech, association, peaceful protest and access to independent media and information
c) Increase public participation in political processes and civic engagement at all levels
d) Guarantee the public’s right to information and access to government data
e) Reduce bribery and corruption and ensure officials can be held accountable

Source: UN High Level Panel, United Nations (2013, p. 50).

The Post 2015 Development Agenda
87

competitive bidding of major government procurement
contracts (legal infrastructure) and in law, citizens can
access the asset disclosure records of members of the
national legislature (Global Integrity Report, 2011).

Alternatively, subjective measures are perception-
based, i.e., ratings rely on perceptions of the de facto
functioning of rules, coming from: (1) experts’ opinions,
e.g., risk-rating agencies, foreign investors, academics or
NGOs; and (2) surveys of national respondents (firms or
individual citizens). Surveys have the advantage of cap-
turing the views of domestic agents directly involved in
the institutions of the country, but are more expensive
to administer and less suitable for cross-country compa-
rability than expert assessments (Williams and Siddiqui,
2008).

Which types of measures have the most desirable
properties? Methodologically, proxies from hard data are
free from the political or ideological bias that experts’
assessments may have. Perhaps the main limitation of
such proxies is that they may be outcomes of gover-
nance, rather than an assessment of its quality (and may
change as a result of changes in factors other than
reforms in the governance apparatus, e.g., such proxies
may reflect the role of national culture and values). Simi-
larly, the advantage of rule-based indicators is that they
are not affected by observer’s bias. In addition, such
measures have the advantage of synthesising many and
diverse formal institutional and policy elements into a
single aggregate governance index. However, they could
well be vulnerable to gaps between the essence of rules
and codes and how they function on the ground (e.g.,
bribes can be codified as illegal, but no agency actually
enforces this law). Therefore, rule-based measures may
exhibit ‘systemic isomorphic mimicry’ – where countries
adopt the outward forms (such as appearances and
structures) of functional states and organisations else-
where to camouflage a persistent lack of function (Pritch-
ett et al., 2013). Thus, while Ghana, Uganda, India and
Venezuela receive the same score from the Global Integ-
rity Report 2011 in terms of the existence of procedures
on the meritocratic recruitment and promotion of civil
servants, the same report finds that in practice, civil ser-
vants in Ghana and Uganda are twice as likely to be
appointed and evaluated according to professional crite-
ria, when compared to India and Venezuela. This sug-
gests that de facto measures, which are sensitive to any
institutional and policy change: both formal and informal,
may be preferred to rule-based or de jure measures of
governance.

Apart from being prone to observer’s bias, an addi-
tional limitation of subjective indicators is that they can-
not indicate which specific policy intervention is actually
responsible for observed changes in governance quality.3

There is no compelling reason to believe that, for
instance, a policy intervention aimed at improving the

rule of law affects other aspects of the institutional envi-
ronment, such as the recruitment of bureaucrats. This
may or may not happen, depending on the actual policy
and the degree to which this is implemented. Yet, the
correlations among popular perception-based measures
show that different dimensions of governance are signifi-
cantly and positively correlated among themselves (see
Hulme et al., 2014), suggesting that policy interventions
in one area might be perceived as improving the general
governance environment. Hence, perception-based indi-
ces might have limited power in distinguishing different
attributes of governance. However, such regularities
could alternatively suggest that there are significant com-
plementarities among dimensions of governance (as
argued in Besley and Persson, 2011), in which case sub-
jective measures would correctly record a simultaneous
change in all the components.

Despite these potential limitations, there is scope for
using subjective assessments: having a wider range of
measures increases the number of dimensions that pol-
icy makers can monitor. But one must carefully choose
the appropriate measure or combination of measures, if
the issue of governance under scrutiny demands. To this
aim, Table 2 summarises types and properties of gover-
nance measures. Moreover, even when they purportedly
capture similar aspects, governance measures should
not be necessarily considered interchangeable. As the
concept of governance quality remains ambiguous,
similar measures may express distinct aspects of
governance.

Having provided an overview of the methodological
issues, we finish the section with some remarks on the
construction of a composite index, which would aggre-
gate the dimensions of interest. A synthetic index, while
not always desirable for academic research, would be
quite useful to policy makers. But this begs the question
of how many dimensions should be part of a composite
index. Even if one could reach a consensus on which
governance dimensions should be included, we would
still be left with the task of elaborating an appropriate
formula to combine the would-be components. For
example, should it be additive or multiplicative? This can
only be decided on the basis of further theoretical foun-
dations on what constitutes governance for develop-
ment.4 Meanwhile, policy makers wishing to draw on
existing data may wish to use disaggregated measures,
although it can be argued that using such ‘dashboards’
may encourage idiosyncratic choices and weaken the
accumulation of knowledge about governance and its
effects. From this, it follows that a useful property of any
aggregate governance index is to make its components
available. On the other hand, if one believes that there
could be complementarities among different elements of
governance, further discussion on a composite measure
combining different aspects would have greater scope.

David Hulme, Antonio Savoia and Kunal Sen
88

2. Governance indicators for the post-2015
development agenda

What are the available measures that could be poten-
tially used for the post-2015 development agenda? Mea-
suring governance quality has gradually become an
industry that sees NGOs, research organisations and com-
mercial providers operating in this field. Reviews and
guides on governance measurement (e.g., Teorell et al.,
2013; Foresti et al., 2014), provide a broader overview of
the available databases and measures. This section
assesses a selection of representative indicators on the
areas of governance identified above (but the list could
be longer, such is the size of the governance rating
industry). To see how governance quality has evolved,
we also illustrate their trends over time.

Table 3 gives a snapshot comparison of selected gov-
ernance indicators on the three dimensions of gover-
nance discussed earlier – administrative capacity, legal
capacity and transparency and accountability. Three facts
stand out: (1) the current practice of measuring gover-
nance quality seems to privilege methodologies based
on a subjective approach; (2) policy makers interested in
the areas of legal capacity, transparency and accountabil-
ity and bureaucratic and administrative quality can
choose from a variety of indicators; (3) efforts to provide
comparable governance measures often face the con-
straint of limited country coverage.

To give an illustration of the temporal evolution, we
examine two databases that – measuring legal and
administrative quality – allow observing governance over
the longest period: the Quality of Government (QoG)
index assembled by Teorell et al. (2013) and the Quality
of Legal Structure and Security of Property Rights
(QoLSSPR) index (Gwartney et al., 2013). In both cases,
the ratings come from subjective assessments of foreign
investors and business experts.5

The QoG index is calculated as the average of rule of
law, corruption in government, and bureaucratic quality

indices from various editions of the International Country
Risk Guide (ICRG, 2012). It spans from 1984 to 2010 and
is rescaled to lie between 0 and 10. This index seems to
capture some of the dimensions of governance quality
that are implicit in the governance goal in the HLP
report, particularly in its rule of law and anticorruption
dimensions. However, the fact that it is expressing the
views of the business community does raise concerns
over its representativeness and legitimacy.

The QoLSSPR index is, instead, a proxy for legal capac-
ity. A component of the Fraser Institute Index of Economic
Freedom, such variable is continuous and ranges between
0 and 10, with a higher score corresponding to higher
quality (see Gwartney et al., 2013). It has been recorded
every five years from 1970 until 2000 (and every year
from 2001 on). Unfortunately, it samples fewer countries
than the ICRG database and it has been assembled over
the years from different sources. Like the QoG, the
QoLSSPR is also constructed from commercial ratings pro-
duced by the business community (including the ICRG,
the Business Environment Risk Intelligence and the Glo-
bal Competitiveness Report), raising the same concerns
over its representativeness and legitimacy.

Table 4 shows the trends in advanced, developing and
transition economies over 2000–2010. The first stylised
fact is the gap in governance quality between advanced
economies and the rest remains wide and stable. A sec-
ond stylised fact is that both measures show that
advanced economies remain a more homogenous group
than developing and transition economies.

Governance quality appears to be a slow-changing
phenomenon and it should also be analysed over a
longer period. Figure 1 below provides further details of
the QoG and QoLSSPR by disaggregating the developing
countries group by region. The end of the Cold War was
accompanied by sharp improvements in governance
quality, suggesting that it has been a positive shock.6

QoG shows a spike for all groups of countries in the mid-
1990s, where all regions of the developing world seem

Table 2. Classification and properties of governance measures

Type of measure
based on:

Objective Subjective

Proxies from hard data De jure rules De facto rules

Advantages Not affected by observer’s
bias.

(1) Not affected by
observer’s bias;

Capture formal and informal rules.

(2) can isolate specific
governance dimensions.

Limitations (1) express outcomes
of governance;

May not capture the
functioning of informal
mechanisms.

(1) Affected by observer’s bias;

(2) do not address
specific governance
aspects.

(2) unable to isolate specific
governance dimensions.

The Post 2015 Development Agenda
89

Table 3. Governance quality, comparing selected indicators

Index and source Methodology Coverage Data

Bureaucratic and administrative quality
Bureaucratic quality, ICRG
(2012)

Subjective. Experts’ assessments which indicate autonomy
from political pressure and strength and expertise to govern
without drastic changes in policy or interruptions in
government services and also the existence of an established
mechanism for recruiting and training.

145 countries Panel,
1984–2011

Government effectiveness,
WGIs (World Bank, 2011)

Subjective. Expert assessments and surveys. It captures
perceptions of the quality of public services, the quality of
the civil service and the degree of its independence from
political pressures, the quality of policy formulation and
implementation, and the credibility of the government’s
commitment to such policies. Aggregating components from
various sources. Continuous, original scale: -2.5 to 2.5.

202 countries Panel,
1996–2011

Bureaucratic
compensation, career
opportunities and
meritocratic recruitment –
Evans and Rauch’s (1999,
2000)

Subjective. Experts’ survey (academics and non) answering
questionnaires on ‘Career Opportunities’, ‘Bureaucratic
compensation’ and ‘Meritocratic recruitment’. The three
measures are equal-weight indices of a subset of questions
eliciting evaluations on recent history (roughly 1970–1990
period), ranging all from 0 to 1.

35 less developed
economies

Cross-section,
1970–1990

Quality of public
administration – Country
Policy and Institutional
Assessments (World
Bank, 2002)

Subjective. Expert assessment of the extent to which civilian
central government staffs (including teachers, health workers,
and police) are structured to design and implement
government policy and deliver services effectively.

77 less developed
economies

Panel,
2005–2011

Legal capacity
Steering capability, BTI,
Bertelsmann Foundation
(2011)

Subjective. Expert assessment evaluating to what extent the
political leadership sets and maintains strategic priorities;
how effective the government is in implementing reform
policy; how flexible and innovative the political leadership is;
and if the political leadership learns from past errors.

119 less developed
economies

Cross-section,
2006

Quality of Legal System
and Property rights,
Fraser Institute

Subjective assessment combining survey and exerts’ opinions,
ranging between 1 and 10; a higher score corresponds to a
stronger protection of private property rights.

139 countries Panel,
1970–2008

Rule of law, WGI (World
Bank, 2011)

Subjective. Expert assessments and surveys. Aggregating
components from various sources. Continuous, original scale:
-2.5 to 2.5. It captures perceptions of the extent to which
agents have confidence in and abide by the rules of society,
and in particular the quality of contract enforcement,
property rights, the police, and the courts, as well as the
likelihood of crime and violence.

202 countries Panel,
1996–2010

Rule of law, ICRG (2012) Subjective. It reflects the degree to which the citizens of a
country are willing to accept the established institutions to
make and implement laws and adjudicate disputes, its scores
evaluate soundness of political institutions, the strength of
the court system, and the provisions for an orderly
succession of power, as opposed to a tradition depending on
physical force or illegal means to settle claims.

145 countries Panel,
1984–2011

Transparency and accountability
Right to Information, and
Freedom of the Media,
Global Integrity (2011)

Both objective and subjective. Expert assessment and surveys
of whether laws exists on the books, on whether citizens
have the legal right to information, and whether the
freedom of the media is guaranteed, and whether in
practice, this is the case. From a scale of 0 to 100.

31 countries Panel,
2006–2011

Open Budget Survey,
International Budget
Partnership (2012)

Subjective, expert assessment of the degree to which country
budgets are transparent, and the extent of civil society and
citizen budget monitoring

100 countries Panel, 2008,
2010, 2012

Source: authors’ compilation.

David Hulme, Antonio Savoia and Kunal Sen
90

to move closer to the advanced economies. But the sub-
sequent worsening slows this process, although some
convergence seems to have occurred. The QoLSSPR pre-
sents a similar evolution across regions. The group of
countries that has improved governance quality most
compared to its initial level is the MENA region (followed
by Latin America), in terms of the QoLSSPR, and Asia (fol-
lowed by Latin America), in terms of the QoG. Note also
that in both cases the transition economies have experi-
enced a significant decrease in governance quality after
the end of the Cold War.

Apart from providing some stylised facts, the evidence
in this section illustrates the difficulties faced by policy
makers wishing to monitor governance for the post-2015
development agenda. Figure 1 reveals that changes in
the quality of governance and legal structure and prop-
erty rights are relatively slow. Changes in governance
quality originate from institutional changes. These are

long-run phenomena that are best monitored with rela-
tively low frequency data. Attempts to measure such
variables on an annual basis may be as likely to change
because of measurement error as much as substantive
change. This suggests that monitoring of such indicators
might be best framed as every five years (and not annu-
ally) or as a three-year rolling average.

Finally, if 2005 is selected as the ‘start’ of the monitor-
ing period for achieving post-2015 goals (as was the case
with the MDGs with a 1990 ‘start’ for goals set in 2000),
then the only available database that can provide mea-
sures for all the UN’s 193 member countries, and for
three governance dimensions identified here, is the
World Governance Indicators (World Bank, 2011). How-
ever, among the limitations of such database, one would
still have to address concerns of comparability over time
(see Arndt and Oman, 2006), as the secondary data sets
they draw from have changed over time. Data from com-

Table 4. Governance quality the world around 2000–2010

Panel (a): Quality of legal structure and security of property rights index

Year 2000 2005 2010

Whole sample Mean 5.83 5.85 5.60
CV 0.33 0.30 0.29
N 123 139 142

Advanced economies Mean 8.34 8.17 7.64
CV 0.14 0.11 0.12
N 30 30 30

Developing economies Mean 4.87 5.05 4.84
CV 0.27 0.28 0.27
N 78 86 87

Transition economies Mean 5.82 5.73 5.69
CV 0.14 0.17 0.12
N 15 23 25

Panel (b): Quality of Government index

Whole sample Mean 5.65 5.28 5.37
CV 0.36 0.39 0.38
N 140 140 139

Advanced economies Mean 8.55 8.42 8.44
CV 0.14 0.14 0.13
N 30 30 30

Developing economies Mean 4.67 4.24 4.37
CV 0.29 0.30 0.28
N 87 87 87

Transition economies Mean 5.45 5.05 5.06
CV 0.29 0.22 0.23
N 23 23 22

Notes: data is from Qwartney et al. (2013) and Teorell et al. (2013). Higher values indicate greater governance quality. The statistics
reported are the simple average (Mean), the coefficient of variation (CV) and the sample size (N). The trends are very similar also when
the same statistics are calculated keeping the sample size equal to the one in the initial year and constant over time. Countries’ classi-
fication follows the IMF system: based on per capita income level, export diversification and degree of integration into the global
financial system (http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/groups.htm, accessed on 25/6/2013).

The Post 2015 Development Agenda
91

mercial organisations is only available on approximately
140 of the UN’s 193 member countries. Moreover, the
possibility of reconstructing the data for missing coun-
tries is quite limited, if not impossible, for measures
adopting a subjective approach.

3. Monitoring governance: which way? Options
and choices

This section first reflects on the challenges facing mea-
suring and monitoring governance: finding a ‘politically
acceptable’ dimension(s) of governance, which is consis-
tent across countries and over time. The second task of
this section is to set the scene for the long term, i.e.,
developing the capabilities for comparative and routin-
ised production of governance measure in UN member
countries.

Thinking short term

The post-2015 development agenda, following the
results-based management principles that underlay the
MDGs, seeks to have ‘SMART’ goals and targets – specific,
measurable, attainable (but stretching), relevant and
time-bound (Hulme, 2010). For the contemporary timeta-
ble (i.e., 2015), which requires a baseline without having
the time to develop new sources, monitoring governance
must therefore rely on one or more existing measures
and databases. Apart from the methodological and data
quality problems discussed earlier, this approach presents
a number of further challenges.

First, most governance databases do not include a sig-
nificant number of developing countries. Apart from the
Worldwide Governance Indicators (WGIs), a significant
number of available governance measures, especially
those produced by political risk consultancies for a clien-

tele of foreign investors (e.g., the ICRG), are not
comprehensive. Apart from coverage problems, using
commercial organisations data may also raise issues of
legitimacy, as they reflect solely the views of the busi-
ness community.

Second, as Kauffmann and Kraay (2008) have stressed,
governance measures can be subject to measurement
error as the ‘true’ concept of governance one would like
to measure is difficult to define. Therefore assessing spe-
cific governance aspects in different countries could face
problems of comparability across countries and over
time. Even the most trusted measures are not immune
to this. However, future empirical analysis could explicitly
examine this problem, so shedding further light on the
degree to which measurement error and conceptualisa-
tion may shape changes in a measure.7

Third, one should reflect on which governance dimen-
sions and measures should be included. There are two
ways to approach this issue. One could argue that good
governance has an intrinsic value in itself, similar to goal
2 in the post-2015 goals proposed by the HLP, which is
on the empowerment of girls and women. Such an
approach takes the Universal Declaration of Human Rights
as the basis for good governance, which as the HLP
report notes, ‘sets out the fundamental freedoms and
human rights that form the foundations of human devel-
opment’ (United Nations, 2013, p. 30). Or one could argue
that good governance has instrumental value, and that
improvement in governance quality has tangible effects
on both material and nonmaterial dimensions of eco-
nomic development. For the former, measures of gover-
nance that capture the nature of state–society relations,
or of the degree of state legitimacy and accountability,
would take precedence in the development of indicators
for the post-2015 goals. For the latter, a good starting
point is to base such a choice on the empirical literature

Figure 1. Governance quality time paths by level of development.

David Hulme, Antonio Savoia and Kunal Sen
92

using governance measures to estimate their effects on
development outcomes. Findings from econometric
analyses at cross-country level in this area are mainly
aimed at explaining economic growth and national
income levels, focusing on the contracting and legal envi-
ronment, suggest that protection of private property
rights is positively and robustly associated with national
income levels. However, even if most would agree that
property rights institutions are crucial to get incentives
right, protecting private property rights represents a polit-
ical challenge. This literature is not clear on whose prop-
erty rights one should protect (e.g., peasants or landlords,
capitalists or workers, foreign or domestic investors, etc.).8

Moreover, other important development outcomes, such
as inequality, health, education and poverty, have
received scant attention so far within this line of research.

Further recent research highlighting the instrumental
value of governance, building on the well-established liter-
ature on developmental states (e.g., Evans, 1995; Evans
and Rauch, 1999; and the collection of articles in Lange
and Rueschemeyer, 2005), increasingly recognises the
importance of state capacity as a fundamental ingredient
for economic development. Approaching governance from
this angle would suggest that the focus in the post-2015
goals should be on indicators that capture the administra-
tive and legal capabilities of states. However, this still
poses a significant measurement challenge, as there is no
universally accepted measure of state administrative and
legal capabilities. Existing measures such as the WGIs, the
ICRG measure of bureaucratic quality or the Evans-Rauch
measure (which captures the Weberian properties of the
bureaucracy) have both strengths and weaknesses. The
WGIs are noncomparable over time as recalled in the pre-
vious section (as well as not being very clear whose opin-
ions they represent). The ICRG and the Evans-Rauch
measures are perception-based and depend on the opin-
ions of a limited set of experts. As Fukuyama (2013) has
argued, the Evans-Rauch measure is the closest to what
we understand by state capacity – ‘the government’s abil-
ity to make and enforce rules, and to deliver services’
(Fukuyama 2013, p. 387). Under this definition, governance
is about ‘the performance of agents in carrying out the
wishes of principals, and not about the goals that princi-
pals set’ (Fukuyama 2013, p. 387). While the Evans-Rauch
measure may be the most desirable from a theoretical
standpoint (if we agree with Fukuyama’s definition), it is
handicapped by the lack of time-series data, and the very
limited coverage of countries (30 countries). One impor-
tant issue here for further discussion is that if indeed we
were to base a measure of governance on the Evans-Rauch
approach, how would we go about conducting the expert
surveys which form the basis of the measure, and how can
we make sure that most, if not all, developing countries
are covered by this measure?

Thinking long term: towards 2030

The idea of setting governance goals for the post-2015
development agenda, and subsequently monitoring
them has important implications for the long-term devel-
opment of comparative governance measures that are
recognised as authoritative by all (or at least the vast
majority) of UN member states. Including governance
goals in the post-2015 development agenda has poten-
tial advantages for the evolution and institutionalisation
of governance statistics; but, it also has dangers.

On the positive side, the inclusion of governance goals
(or targets or indicators) would increase the pressure on
governments, bureaucracies, professionals/researchers
and civil society to collect relevant data and improve the
quality of such data. Arguably, the greater availability of
such data would lead to a greater focus on improving
governance.

On the negative side, the rapid selection of a measure(s)
to meet the 2015 deadline might:

• Lead to the selection of a sub-optimal measure from
‘what is available’. This would mean that the interpre-
tation of changes in governance in the future would
be challenged both technically (the measure is flawed)
and politically (the measure is ideologically biased
against some countries).

• Damage the long-term evolution of a professional
cadre of ‘governance statisticians’; of widely accepted
standards and measures for governance; and, the insti-
tutionalisation of governance measures as a routine
part of national and international data collection and
analysis.

In an ideal world, those engaged in setting the post-
2015 development agenda would carefully assess the
trade-offs of focusing on the short-term task of identify-
ing measures for 2015 against the long-term task of insti-
tutionalising top quality governance statistics across the
world. In the world we live in, leaders in this field may
need to focus on developing ‘the best measures we can
for 2015’ while setting in motion processes that will pro-
mote the institutionalisation of governance statistics
longer term. One ‘governance target’ would be that by
2020 all UN member states could produce a basic set of
governance statistics that meet an international stan-
dard.9 One of the great successes of the UN system –
but a ‘quiet success’ – has been its contribution to the
evolution of globally accepted statistical measures, qual-
ity standards, statistical professionals and national statisti-
cal capacities (Ward, 2004). The quality of these national
measures could be partly assessed by independent ana-
lysts comparing what national statistical measures with
the independent measures produced by international
groups.

The Post 2015 Development Agenda
93

4. Approaches to setting governance goals

Finally, mention must be made about the different ways
in which governance goals/targets/indicators could be
set and the relative strengths and weaknesses of these
approaches. The MDGs used a number of different types
of target.10

1. Percentage reductions/improvements in outcomes –
Most common were percentage reductions in bad
outcomes (e.g., halving income poverty, reducing
child mortality by two-thirds) partially based on
stretching (i.e., accelerating) the pre-existing rate of
improvement in such indicators. For governance mea-
sures, for which there is such limited data on histori-
cal rates of change, this approach has limited
relevance.

2. Universal outcome achievement – Also common was the
universal achievement of some targets by 2015 (e.g.,
universal primary education, elimination of gender dis-
parities in education, full employment, universal access
to reproductive health). For governance measures, con-
ceptualising universal achievements is highly problem-
atic: what would ‘universal accountability’ or ‘total
transparency’ or ‘full property rights’ actually mean?

3. Absolute outcome achievement – Less common, and
rather strange because of its arbitrariness, was the
setting of absolute global targets (e.g., significantly
improving the lives of 100 million slum dwellers).
Given the existing dissatisfaction with these MDG
measures, there seems to be little point in pursuing
such an approach, as the justification of such tar-
gets would have no (or very limited) technical basis.

4. Process-based targets – There were also a number of
‘process-based’ targets for issues that were hard to
quantify and/or were politically controversial. These did
not set outcome targets but called for improved
national and/or global processes (e.g., the integration of
sustainable development principles into national poli-
cies, the development of a fairer global trading and
financial system, action to address the needs of the
least developed countries). Such an approach might be
possible for some governance targets but, learning from
the MDG experience, actual targets and completion
dates would need to be specified if they are to encour-
age countries (or the international community) to accel-
erate progress in improving important processes.
For governance targets, one could also identify at

least two other approaches to setting targets.
5. Minimum standard with continuous improvement –

That a universal minimum standard be achieved by a
set date but that all countries should be continuously
improving on their achievement (so that all countries
achieve the minimum target but no country can

‘relax’ simply because that minimum standard has
been achieved). As an example, by 2030 all countries
achieve a target of 80 per cent of social transfer recip-
ients reporting ‘no corruption’ when accessing trans-
fers and, for all countries that have achieved this
target, continued reductions in reports of corruption
on an annual basis.

6. National target-setting – That all countries agree to a
goal but that some form of inclusive, national deci-
sion-making process sets the actual target (so that tar-
gets are not ‘imposed from above’). For example, a
UN target that all countries are to reduce recipient
reported levels of social transfer corruption on an
annual basis but the specific rate of reduction (5 per
cent or 10 per cent per annum) is to be determined
independently by each national legislature based on a
national debate on what is desirable and feasible in
that specific context.

Careful consideration will need to be given to the
issue of what approaches to goals and target setting are
best for governance. Given that many governance goals
and targets are about improving processes, approaches
(4), (5) and (6) are the logical preference. In particular,
combinations of approaches (5) and (6) are particularly
attractive as they could permit the setting of global mini-
mum targets at the UN integrated with democratically
set national targets. National targets would set either
‘faster’ achievement of the UN global targets or set the
rate at which higher levels of target achievement are to
be attained). However, given the MDG goal 8 experience,
such approaches would have to avoid weak specification
that permits them to be side-lined by member states.

5. Conclusions

This paper has offered an overview of the strengths and
limitations in current empirical research on governance
quality and their implications for measuring, setting and
monitoring governance goals and targets in the post-
2015 development agenda. Of particular significance are
ongoing debates about whether good governance is
good for development and/or, whether good enough
governance is the best to which nations can aspire.

It will be important for those engaged in improving
governance to think both short term and long term
about setting, measuring and monitoring governance
goals/targets. We have argued that, in the short term,
existing measures on governance quality used in cross-
national research can be exploited by policy makers
shaping the post-2015 development agenda to capture
aspects of legal, bureaucratic and administrative capacity.
We have utilised them to provide stylised facts on its
evolution. However, such an approach is subject to a
number of challenges, e.g., country coverage, data

David Hulme, Antonio Savoia and Kunal Sen
94

comparability and the ideological base of the concepts
of governance measured. As a consequence, setting and
monitoring governance goals should be seen as planning
for the long run. Longer term, policy makers need to
think about how the selection of goals/targets for the
post-2015 development agenda can go beyond rapidly
creating goal 10 of the HLP’s Illustrative Goals and foster
the institutionalisation (measures, methods, standards,
training, professional accreditation) of high quality gover-
nance statistics at both national and international levels.
The post-2015 development agenda is only one early
step along the path to establishing measures of gover-
nance as a routine statistical artefact, as has happened
with the economic and social statistics that we take for
granted today.

Notes
1. A similar argument can be made for not including the achieve-

ment of human rights as a core component of good gover-
nance. While successful institutionalisation and legalisation of
human rights are important as ends in themselves in the devel-
opment process, these can be seen as neither necessary nor suf-
ficient in the delivery of development goods (Nelson, 2007).

2. In economics, thorough surveys on measuring governance are
Williams and Siddiqui (2008) and Kauffman and Kraay (2008).
Within the public administration scholarship, an effective review
of the debate on public sector performance is Van de Walle
(2009).

3. Political scientists have produced powerful critiques, lamenting
the lack of conceptual clarity and the uncertainty of ratings
(Kurtz and Schrank, 2007; Hanson and Sigman, 2013).

4. Recent work by political scientists, such as Hanson and Sigman
(2013), use factor analytic methods such as Bayesian latent vari-
able analysis to construct composite measures of governance and
state capacity from different dimensions of governance. However,
as Goertz (2006) notes, the relationship between the indicators of
governance used in the factor analytic methods and the concept
of governance as broadly understood is often tenuous.

5. See Hulme et al. (2014) for more statistical evidence.
6. The apparent improvement in governance quality measures in

this period needs further investigation and is the subject of a
separate paper – see Savoia and Sen (2013). At least in part, this
could be because western countries stopped allocating foreign
aid to ‘bad’ regimes (for example, Banda in Malawi and Mobutu
in the Congo were aid recipients during the Cold War to ensure
they did not support the Soviet Union even though donors
knew that they were badly governing their respective states).

7. An additional factor limiting both policy and academic research
is the short time coverage of existing databases. Unfortunately,
no measures have substantial time-series variation. But gover-
nance phenomena are persistent and trends should be studied
over the long run (see Savoia and Sen, 2014). There is a lot to
gain from bringing temporal depth to governance measures in
the future. Monitoring and policy design could be better
informed by understanding the historical evolution of gover-
nance phenomena. Academic research could offer better sup-
port to policy makers, if it will be able to draw on time-series
variation when the tracing the effects and origins of good
governance.

8. See Chang (2011) and Lawson-Remer (2012) for a critical per-
spective on institutions and growth.

9. The issue of exactly ‘what’ data national statistical agencies
should collect, the methods to be used and ‘how’ international
standards could be agreed merits detailed thought but we are
not able to cover it in this article. The recent Strategy for the
Harmonisation of Statistics in Africa report covers such issues
for nongovernance measures (African Union, n.d.).

10. In addition to setting targets the MDGs also informally utilised a
comparative performance approach to target achievement. By
listing countries that were ‘on’ and ‘off’ track for target achieve-
ment a ‘league table’ element was brought into play.

References

Acemoglu, D. and Robinson, J. (2012) Why Nations Fail: The Origins
of Power, Prosperity and Poverty. London: Profile Books.

African Union (n.d.) Strategies for the Harmonisation of Statistics in
Africa. Addis Ababa, Ethiopia: African union, Statistics Division.

Andrews, M. (2013) The Limits of Institutional Reform in Development.
Cambridge: Cambridge University Press.

Arndt, C. and Oman, C. (2006) Uses and Abuses of Governance
Indicators. Paris: OECD Development Centre Studies.

Baland, J. -M., Moene, K. O. and Robinson, J. A. (2010) ‘Governance
and Development’, in Handbook of Development Economics.
Amsterdam: Elsevier, volume 5, pp. 4597–4656.

Bardhan, P. (1999) ‘Democracy and Development: a Complex
Relationship’, in I. Shapiro and C. Hacker (eds.), Democracy’s
Values. Cambridge: Cambridge University Press.

Bardhan, P. (2005) ‘Institutions Matter, but which ones?‘ Economics
of Transition, 13 (3), pp. 499–532.

Bertelsmann Foundation (2011) Bertelsmann Transformation Index
[online]. Available from: http://www.bertelsmann-trans
formation-index.de/en/bti/ [Accessed 13 June 2013].

Besley, T. and Persson, T. (2011) Pillars of Prosperity: The Political
Economics of Development Clusters. Princeton, NJ: Princeton
University Press.

Bevir, M. (ed.) (2011) The Sage Handbook of Governance. London:
Sage.

Centeno, M. A. (2002) Blood and Debt: War and the Nation-State in
Latin America. University Park: Penn State Press.

Chang, H-J. (2011) ‘Institutions and economic development: theory,
policy and history’, Journal of Institutional Economics, 7(4),
pp. 473–498.

Cingolani, L., Thomsson, K. and de Crombrugghe, D. (2013) ‘Minding
Weber More Than Ever? The Impacts of State Capacity and
Bureaucratic Autonomy On Development Goals’, UNU-MERIT,
Maastricht Working Paper No. 52.

Evans, P. (1995) Embedded autonomy: states and industrial
transformation. Princeton, NJ: Princeton University Press.

Evans, P. B. and Rauch, J. E. (1999) Bureaucracy and growth: a cross-
national analysis of the effects of ‘Weberian’ state structures on
economic growth. American Sociological Review, 64 (5), pp. 748–765.

Fearon, J. D. and Laitin, D. D. (2003) ‘Ethnicity, insurgency, and civil
war’, American Political Science Review, 97 (1), pp. 75–90.

Foresti, M., Wild, L., Takeuchi, L. R. and Norton, A. (2014) Governance
Targets and Indicators for Post 2015: An Initial Assessment,
Working Paper. London: Overseas Development Institute.

Fukuyama, F. (2013) ‘What is Governance?‘ Governance, 26(3),
pp. 347–368.

Goertz, G. (2006) Social Science Concepts: An User’s Guide, Princeton,
NJ: Princeton University Press.

The Post 2015 Development Agenda
95

Global Integrity (2011) Global Integrity Report [online]. Available
from: https://www.globalintegrity.org/downloads/ [Accessed 13
June 2013].

Grindle, M. S. (2004) ‘Good Enough Governance: Poverty Reduction
and Reform in Developing Countries’, Governance, 17, pp. 525–548.

Gwartney, J. G., Lawson, R. and Hall, J. (2013) Economic Freedom of
the World: 2013 Annual Report. Vancouver: Fraser Institute [online].
Available from: www.freetheworld.com [Accessed 13 June 2013].

Hanson, J. and Sigman, R. (2013) ‘Leviathan’s Latent Dimensions:
Measuring State Capacity for Comparative Political Research.’
Paper presented at the World Bank Political Economy Brown Bag
Lunch Series, March 21.

Hendrix, C. S. (2010) ‘Measuring state capacity: Theoretical and
empirical implications for the study of civil conflict’, Journal of
Peace Research, Washington, 47(3), pp. 273–285.

Holmberg, S., Rothstein, B. and Nasiritousi, N. (2009) ‘Quality of
Government: What You get’, Annual Review of Political Science,
12, pp. 135–161.

Hulme, D. (2010) Global Poverty: How Global Governance is Failing
the Poor. London: Routledge.

Hulme, D., Savoia, A. and Sen, K. (2014) ‘Governance as a global
development goal? Setting, measuring and monitoring the Post
2015 Development Agenda’, ESID Working Paper No. 32. Manchester:
University of Manchester [online]. Available from: http://www.
effective-states.org/working-paper-32/ [Accessed 13 June 2014].

ICRG (2012). ‘International Country Risk Guide Researchers Dataset,
Table 3B’. The Political Risk Services Group, third edition,
Syracuse, NY: International Country Risk Guide.

Kauffman, D. and Kraay, A. (2008) ‘Governance Indicators: Where Are
We, Where Should We be Going?‘ World Bank Research Observer,
23 (1), pp. 1–30.

Kurtz M.J., Schrank A. (2007) ‘Growth and Governance: Models,
Measures, and Mechanisms.’, Journal of Politics, 69, 2 (May),
pp. 538–554.

Lange, M. and Rueschemeyer, D. (eds) (2005) States and
Development: Historical Antecedents of Stagnation and Advance.
London: Palgrave Macmillan Press.

Lawson-Remer, T. (2012) ‘Property Insecurity’, Brooklyn Journal of
International Law, 38 (1), pp. 145–188.

Lin, Y. L. and Nugent, J. (1995) ‘Institutions and Economic
Development’, in J. Behrman and T. N. Srinivasan (eds), Handbook
of Development Economics, vol. III. Amsterdam: Elsevier Science.

Mazzuca, S. L. (2010) ‘Access to Power Versus Exercise of Power
Reconceptualizing the Quality of Democracy in Latin America’,
Studies in Comparative International Development, 45, pp. 334–357.

Mulligan Casey, B., Gil, R. and Sala-i-Martin, X. (2004) ‘Do Democracies
Have Different Public Policies than Nondemocracies?’, Journal of
Economic Perspectives, 18 (1), pp. 51–74.

Nelson, P. (2007) ‘Human Rights, the Millennium Development
Goals, and the Future of Development Cooperation’, World
Development, 35 (12), pp. 2014–2055.

Ottervik, M. (2013) ‘Conceptualizing and Measuring State Capacity:
Testing the Validity of Tax Compliance as a Measure of State
Capacity’, Quality of Government Institute Working Paper no. 20
Gothenburg.

Pritchett, L., Woolcock, M. and Andrews, M. (2013) ‘Looking Like a
State: Techniques for Persistent Failure in State Capability for
Implementation’, Journal of Development Studies, 49 (1), pp. 1–18.

Rajkumar, A. S. and Swaroop, V. (2008) ‘Public Spending and
Outcomes: Does Governance Matter?‘ Journal of Development
Economics, 86 (1), pp. 96–111.

Rauch, J. E and Evans, P. (2000) ‘Bureaucratic Structure and
Bureaucratic Performance in Less Developed countries’, Journal
of Public Economics, 75 (1), pp. 49–71.

Rodrik, D., Subramanian, A. and Trebbi, F. (2004) Institutions rule: the
primacy of institutions over geography and integration in economic
development. Journal of Economic Growth, 9 (2), pp. 131–165.

Savoia, A. and Sen, K. (2013) ‘Do We See Convergence in
Institutions: A Cross-Country Analysis’, Development Economics
and Public Policy Working Paper Series No. 33, Manchester:
University of Manchester.

Savoia, A. and Sen, K. (2014) ‘Measurement, Evolution, Determinants
and Consequences of State Capacity: a Review of Recent
Research’, Journal of Economic Surveys, forthcoming.

Sundaram, J. K. and Chowdhury, A. (2012) Is Good Governance Good
for Development? London: Bloomsbury Academic.

Tabellini, G. (2005) ‘The Role of the State in Economic
Development’, Kyklos, 58(2), pp. 283–303.

Teorell, J., Charron, N., Dahlberg, S., Holmberg, S., Rothstein, B. and
Sundin, P. et al. (2013) The Quality of Government Dataset,
version 15 May 13. University of Gothenburg: The Quality of
Government Institute [online]. Available from: http://www.qog.
pol.gu.se [Accessed 13 June 2013].

UNDP (2013) Reflections on social accountability: Catalyzing democratic
governance to accelerate progress towards the Millennium
Development Goals, New York: UNDP, July. Available at:http://www.
undp.org/content/dam/undp/documents/partners/civil_society/
publications/2013_UNDP_Reflections-on-Social-Accountability_EN.
pdf [Accessed 13 June 2013].

United Nations (2013) Report of the High-Level Panel on Post2015
MDGs. New York, NY: UN.

Van de Walle, S. (2009) ‘International comparisons of public sector
performance: how to move ahead?‘ Public Management Review,
11 (1), pp, 39–56.

Ward, M. (2004) Quantifying the World: UN Ideas and Statistics.
Bloomington: Indiana University Press.

Williams, A. and Siddiqui, A. (2008) ‘The Use (and Abuse) of
Governance Indicators in Economics: a Review’, Economics of
Governance, , 9 (2), pp, 131–175.

World Bank (1992) Governance and Development. Washington, DC:
World Bank.

World Bank (2002) ‘Country policy and institutional assessment 2002
assessment questionnaire’ [online]. Available from: http://
siteresources.worldbank.org/IDA/Resources/CPIA2002
[Accessed 13 June 2013].

World Bank (2011) Worldwide Governance Indicators (WGI) project
[online]. Available from: http://info.worldbank.org/governance/
wgi/index.asp [Accessed 13 June 2013].

Author Information
David Hulme, Professor of Development Studies at the Institute for
Development Policy and Management (IDPM), University of Man-
chester, and Director of the Brooks World Poverty Institute (BWPI)
and the Effective States and Inclusive Development Research Centre
(ESID).

Antonio Savoia, Lecturer in Development Economics at the Univer-
sity of Manchester and researcher at the Effective States and Inclu-
sive Development Research Centre (ESID).

Kunal Sen, Professor of Development Economics at the Institute for
Development Policy and Management (IDPM), University of Man-
chester, research director of the Effective States and Inclusive Devel-
opment Research Centre (ESID) and Professorial Fellow of the
Brooks World Poverty Institute.

David Hulme, Antonio Savoia and Kunal Sen
96

Globalization and the economic role of the
state in the new millennium*

Joseph Stiglitz

This essay concerns the process of globalization, the integration of economies

around the world which has put new demands on nation-states at the very same

time that, in many ways, it has reduced their capacities to deal with those demands.

The nation-state today is squeezed, on the one side, by the forces of global economics

and, on the other side, by the political demands for devolution of power.

1. Introduction
This essay concerns the process of globalization, the integration of economies around
the world which has put new demands on nation-states at the very same time that, in
many ways, it has reduced their capacities to deal with those demands. The nation-state
today is squeezed, on one side, by the forces of global economics and, on the other side,
by the political demands for devolution of power.

1.1 An example: the constraints imposed by globalization on taxation and
redistribution

An example of the constraints that have been imposed by globalization are the
difficulties of taxation. With capital being movable from one jurisdiction to another, if
one tries to impose a stronger taxation on capital, capital simply moves out. Ironically,
just at the time that inequality has being growing—and it has grown enormously over
the last twenty-five years—the ability to redistribute income through taxation of capital
has been reduced enormously.

1.2 The contrast between nation-building 150 years ago and globalization today:
the role of the visible hand

At the time that nation-states were being formed 150 years ago, communication and
transportation costs were falling; it is these same forces that have given rise to the
process of globalization. A government was in place that helped regulate these processes
of nation-building, of building national economies. Professor Alfred Chandler of
Harvard who described the process of nation-building in the United States talked about
the ‘visible hand’ (Chandler, 1977). It was not the ‘invisible hand’, but the ‘visible hand’
that helped shape the process of nation-building.

Industrial and Corporate Change, Volume 12, Number 1, pp. 3–26

*Originally presented as a lecture in Rome, January 2001.

1.3 Global governance without global governance

Today, we have an analogous process of globalization, but we do not have global
institutions that deal with its consequences. We have a system of global governance
without global government. Worse still, just when the need for global institutions has
never been greater, the confidence in the global institutions that do exist, like the
International Monetary Fund (IMF) and the World Trade Organization, has never been
less. There is a yawning gap between the demands placed on our international institu-
tions and what those institutions can perform.

2. The failure of the reform of the international economic
architecture

Since the East Asia crisis in 1997, there has been an enormous number of discussions on
the reform of the global economic architecture, but almost nothing has happened. For
those who have been participating in that process, this does not come as a surprise: the
very parties that played a central role in the failures associated with the crisis have
played a pivotal role in the reform discussions. To be sure, changes in international
institutions will, under the best of circumstances, be difficult. But given the seeming
momentum behind change, the fact that so little seems to have emerged is, to say the
least, disappointing. But, in retrospect at least, it should now be clear why nothing has
happened, and why little should have been expected to happen. To put it perhaps a little
too bluntly, and oversimplified: it was because of the role of special interest groups,
particularly in what I call the G1 (the United States).

2.1 An example: lack of transparency in the debate about transparency

A little episode helps demonstrate what I have in mind. At the beginning of the East Asia
crisis, everybody talked about the importance of transparency. Transparency is a
problem. There was a certain irony, though, in that the criticism was coming from the
IMF, which is among the least transparent of all the international institutions, and from
the US Treasury, which within the US government is the least transparent agency (apart
from the CIA and the military). When I worked at the White House (as Chairman of
the Council of Economic Advisers), the US Treasury used to fight hard to prevent us
from finding out what it was doing. They viewed themselves as an independent part of
government.

To return to the point: there was this enormous criticism of the lack of transparency
in East Asia coming from the least transparent institutions. As the debate progressed,
people, particularly in Asia, but also in Australia and in other places, started asking for a
broad-based transparency. It does not do much good to know about some capital flows
if we do not know about all capital flows. And all of a sudden, people realized that
meant you have to find out about hedge funds and off-shore banking centers, and make
them transparent. At that point, the US Treasury changed their tune. Larry Summers,
who was soon to become Secretary of Treasury, started arguing about how too much

4 J. Stiglitz

transparency would have adverse effect on incentives to gather information. The whole
debate about transparency was completely undermined, and that part of the process of
reforming the global economic architecture came almost to a halt. While the outcome
of those discussions was not to make hedge funds more transparent, they did make the
role of special interests in driving US policies more transparent!

2.2 Small achievements versus big failures

I should be clear: some changes have been made in response to the global financial crisis
and I do not want to underemphasize the value of that work. But it is not a change in the
fundamental structure of the global economic architecture. We have to recognize that
there have not been the kinds of reforms that would be required to substantially enhance
global financial stability. As we have seen in the following years, financial instability is a
fact of life. Each nation must learn to deal with the problems it confronts because of
globalization. This is particularly important for the developing countries (that have
been the center of my concern for the past few years), who both have the opportunity to
benefit from globalization but also face the risk of being adversely affected by it.

3. The economic role of the state in light of the East Asia crisis
This is a good time to talk about the issue of the economic role of the state, because we
stand at a crossroad where we can look back with some distance at the global economic
crisis of 1997–98 and look forward to the changes in the economy and the role of
government that are presented by the new economy and the new millennium. To
understand why the 1997–98 crisis plays such an important role in thinking about these
issues, one has to go back to the mindset of 1996 and early 1997. I remember myself, in
speeches that I gave at that time, talking about capital flows from developed to
less-developed countries having increased six-fold in six years: an amazing increase!
There was a triumphant view of ‘American-style’ capitalism. There was the view that the
business cycle had been repealed. After 200 years in which the market economies had
fluctuated up and down, people thought this was the end of the business cycle. And all
of a sudden all of this came to a crash, beginning in Thailand, and then in Indonesia,
Korea, Russia, Brazil, now Argentina, Turkey, and we can go on.

3.1 How the East Asia crisis challenged triumphant capitalism

The debate about what caused the crisis was extremely heated, and for an obvious
reason: in the most natural interpretation, the events challenged the orthodoxy that
capitalism ‘American style’ was going to benefit everybody. But instead, the world
seemed to come tumbling down. In fact, what the events did was to put what had hap-
pened from 1990 to 1996 in a broader historical context. There had been fluctuations in
capitalism for 200 years. There had been real estate booms and busts in the United
States, in Finland, in Sweden, in Norway. What happened in Thailand was very little
different from the ordinary real estate boom and bust. Those who wanted to maintain
the myth of the new, triumphant, American-style capitalism, wanted to make more of it

Globalization and the economic role of the state in the new millennium 5

than that. They wanted to reduce it to a problem caused by bad policies in non-
transparent countries that had really failed to adopt and adapt to American-style capitalism;
the problem, in this perspective, was not with capitalism, but with Thailand. But when
Argentina, a country that had been described as the IMF’s poster child, doing every-
thing that IMF told it to do, had problems, then everybody recognized that the blame
for the problems could not just be shifted to each country when it had its problems.
There was something wrong with the system; something perhaps fundamental was
defective. The 1997 crisis was so important because it required a re-examination of the
nature of capitalism and reminded us that there were still some very significant risks.
Globalization and market capitalism had the potential for enormous benefits, but also
posed some serious risks.

3.2 Conflicts over values and perspectives

It is also the case that the way in which the crisis was dealt with served to remind us of
the deep divides in the values and perspectives among and across nations. To give you
just a few examples: to save the creditors, to save the banks who had lent billions of dollars,
the lives and livelihood of millions of people were put in jeopardy. Unemployment rates
soared by factors of 5–10 in some countries. The seriousness of the recessions and
depressions that resulted in East Asia are hard to fathom. It was the worst economic
downturn since the Great Depression. Incomes fell by 20–30%, GDP fell by 15–20% in
some countries. The IMF was supposedly created (under the inspiration of Keynes) to
provide countries with the liquidity to finance fiscal expenditures to reduce the
magnitude of economic downturns; yet it is clear that the policies that were imposed by
the global institutions like the IMF exacerbated that downturn. Even the IMF now
agrees that it imposed excessively contractionary fiscal policies. It was not as if we did
not have the knowledge, as if we did not know how to counteract economic downturns.
What was required was what we teachers of economics have been teaching our students
in course after course in economics, all around the world, for more than half a century.
And yet, decisions were made that were exactly the opposite of what we teach in our
basic economics courses. For me, as an economist, it was, initially, very hard to
understand. Eventually, I came to appreciate that, at least in part, the IMF had different
objectives—they were not as concerned with maintaining the strength of the economies
in the region as in preventing a default against Western banks.

Within a market economy, when a private person cannot pay a debt, bankruptcy
laws deal with that problem. But the IMF and the US Treasury advised—insisted—
countries not resort to bankruptcy as this would have been a violation of the sanctity of
the credit contract. In order to preserve the credit contract, they were willing to tear up
the social contract that binds people together, resulting in the kind of riots that took
place in Indonesia. In December 1997, in a meeting in Kuala Lumpur, in which Michel
Camdessus, former IMF Managing Director, and the finance ministers of the G20 were
present, I forecast that if contractionary policies continued in the way that they were in
Indonesia, a highly fractionated society, there would be social and political turmoil

6 J. Stiglitz

within half a year. It happened in five months. The point is that even if you had no
compassion for the people who lost their jobs, for people whose wages were cut by 20%,
it was bad economics, because with the social and political turmoil there was capital
flight and social disruption, from which the economy is still recovering.

3.3 New perspectives on international governance

Thus, the global financial crisis served not only to expose the weaknesses in ‘American-
style’ triumphant capitalism, but also to expose the problematic nature of the
international institutions in charge of governing globalization. Issues of transparency
were every bit as important for these international institutions as they were for the
governments of the countries they were criticizing. Indeed, behind closed doors, it
appeared that policies were adopted which were contrary to the very reason they were
created—to enhance global economic stability and provide countries with the credit
they need to avoid recessions—not to demand recessionary policies in return for aid. In
fact, as people did research on this crisis, it became clear that the underlying source of
the problem was the capital market liberalization which the IMF itself had foisted on
these countries, as it had done around the world. Interestingly enough, today the
IMF agrees that it made a mistake: excessively rapid capital market liberalization is
dangerous for small, less-developed economies. But it recognized this only after the
damage had been done. And the damage has been enormous. That their governance
structures did not accord, in fundamental ways, with democratic principles had long
been recognized—those who were most adversely affected by the crisis and the policies
imposed by the IMF did not even have a seat at the table—but the global financial crisis
made transparent the full consequences.

3.4 Lessons from the East Asia for the economic role of states

These events dramatically illustrate the risks that globalization poses to many econ-
omies. But the theme of this essay is the economic role of the state under globalization,
and I want to return to that theme. The crisis was not produced by too large a govern-
ment, but by government not doing the right thing. The existing process of global
governance has some very major problems, and, given that we are not able to address
them at a global level, these impose enormous burdens on the nation-state. Looking
forward, the new economy and the changes in technology that have occurred in the last
decade have had an enormous impact and will have even more enormous impacts, not
only on the economies, but on the role of government. We are now at a crossroads,
recognizing the mistakes and the problems of the past and looking forward to some
very dramatic changes.

4. The third way
I would like to try to put into perspective the thinking today about the economic role of
the state. There has been tremendous convergence about this from several perspectives.

Globalization and the economic role of the state in the new millennium 7

On the one hand, fifty years ago, people talked about the power of the market, about the
fact that the ‘invisible hand’ solved all problems.

4.1 The strengths and weaknesses of markets

Today, we are much more aware of the benefits from markets, but, at the same time, we
are also more aware of market failures, of the pervasiveness of these market failures.
These market failures are not just related to problems of the environment, problems of
public goods, like national defense, areas where everybody recognizes a need for
government. The research that I and others have done has highlighted that whenever
markets are incomplete or information is imperfect, they do not work in the way that
Adam Smith envisaged. In some sectors of the economy, like the financial sector, or the
healthcare sector, these limitations are very important.

4.2 The strengths and weaknesses of collective action

On the one hand, we have become much more aware of the limitations in markets. On
the other hand, we have also become much more aware of the limitations of collective
action, of the difficulties government has in addressing many of these market failures.
Some of these have been discussed extensively in the literature, such as the problems of
‘red tape’ and the difficulties of dealing with bureaucracy, or the problems of regulatory
capture, that is to say, the fact that, quite often, the regulator itself is controlled by
special interests, resulting in a government that, rather than serving the general interest,
advances special interests. This is even true when we talk about nationalized enterprises.
We used to talk about nationalization as a solution to the problem of ensuring that
enterprises worked in the broader interests of society, but as Andreas Papandreou, a
former prime minister of Greece, pointed out when he came into office, one of the
major problems he was confronted with was the socialization of the national enter-
prises. He recognized that national enterprises were enterprises that were working for
their own managers, for their own workers, but not for society more generally. He took
up the burden of the socialization of national enterprises, and at the end even he recog-
nized that he failed—the task was nigh impossible. These are well-known problems.

But we also have recognized that there are weaknesses in our democratic processes
themselves. I have in mind not just the problems that occurred in the 2000 US presi-
dential election in Florida, but more fundamental, more persistent problems having to
do with voter registration and campaign financing, all of which result in voices of
special interests being heard loudly and voices of some people, like the very poor, not
being heard at all. We have to recognize that our democratic processes today are still
imperfect. What we are working towards is better, more democratic processes. To give
you an example, many governments today still do not have freedom of information
acts, or right-to-know laws. The government treats the information that it has as if it
were its own and not the people’s. How can people participate in decision-making if
they do not know what is going on? The notion of transparency that was raised in the
crisis is really a very fundamental issue. We need to think about it in terms of our own

8 J. Stiglitz

societies, and in terms of the passage of freedom of information acts and making those
acts actually work.

4.3 The third way: between socialism and laissez-faire

Having recognized both the limitations of governments and the limitations of the
market, there is now a movement around the world towards what is increasingly being
called the third way, which lies between socialism and laissez-faire. There is a broad
consensus that a free-market, laissez-faire approach does not work, and there is a broad
consensus that socialism, with government domination of the economy, does not work
either. But between these two extremes there is a very wide range. For instance, in the
United States, the Democratic Party talks about ‘new democrats’ and the Republican
Party talks about ‘compassionate conservativism’—these both represent a third way;
both parties are saying there is a need for market and a need for government. However,
there still is a very marked difference between these two perspectives. To a large extent,
the third way has come to dominate the political scene. But because there is not a single
third way, but many third ways, there remains enormous scope for political discourse.
We have put away the extremes—and that is an important step in the right direction.
We are now looking at the choices inside the extremes, but there are enormous differ-
ences among these choices.

4.4 Principles of the third way

I would now like to try to highlight what I view as the way to think about choosing
among the third ways.

Partnerships and complementarities between government and the private sector. First, in
the past, we have thought too often of dividing society’s activities into what should go in
the public sector and what should go in the private sector. We divided society into
public and private. On the contrary, one of the essential insights of the third way is that
one should think about the public and private sectors in terms of complementarity and
partnership. Take the example of the regulation of financial markets. Most of us agree
that government should not be involved in allocating credit, of deciding who should get
loans; that is probably not the government’s comparative advantage. But there is
another fundamental problem with government-allocated credit: in too many countries,
the opportunities for corruption have not been resisted. (Outsiders find it difficult to
ascertain whether an individual has been given a loan at an interest rate which does not
fully reflect the actuarial risk.) On the other hand, we also recognize that an unregulated
financial sector almost inevitably winds up with enormous problems of instability.
Regulation in the United States began in 1863 in the middle of the Civil War. It was
introduced, in part, because it was felt that after the Civil War it was important to have a
strong nation, and without a strong national banking system the US could not have a
strong national economy. Without strong regulation, banks often engage in ‘insider
lending’ and other bad lending practices. Not only are resources wasted, but all too

Globalization and the economic role of the state in the new millennium 9

often the resulting weaknesses result in financial crises, with the public having to pick
up the tab.

The general perspective which I want to emphasize is that the public and the private
sectors should not be viewed as alternatives but as complements to each other. Finding
the right balance is critical.

Social justice and democratic processes. There are two other aspects of the third way
that are particularly stressed by what is often called the European democratic left: first, a
commitment to social justice; and, second, a commitment to democratic processes.
These two elements are actually interrelated in a number of different ways. First, the
outcome of any process led by any political institution depends on governance, on the
rules by which the institution is governed. Accordingly, the emphasis that is going to be
placed on social justice in evaluating choices will itself depend on governance struc-
tures. Let me give you an example of what I have in mind. I apologize for repeatedly
drawing upon the example of the IMF and East Asia crisis, but it is the one that I just
lived through and it has had a very big effect on my own thinking on these subjects. It
just ‘happened’ that the IMF was able to find $150 billion to bail out the banks but could
not find $1 billion for food subsidies for the people who were thrown out of jobs. To
me, that seems strange: $150 billion for the banks and not $1 billion for the people who
were thrown out of jobs! Let us think for a moment about the governance of the IMF,
the global institution that was responsible for those decisions. The voting rights in the
IMF are allocated not by usual democratic principles but by economic power, and not
by economic power as of today, but economic power as of 1944 (with some revisions
since then). There is only one country in the world that has a veto power at the IMF, and
it is the G1. In most of our democracies, we do not believe in property qualifications for
voting. We do not believe that you need to own property in order to vote, even when
voting affects economic issues. We do not allocate voting rights by dollars or lira; but
when it comes to international institutions, we do. Moreover, consider a country like
China: its IMF voting rights have not kept pace with the strength it has acquired in
the global economy. Given the IMF’s voting structure, its governance, is it a surprise
that there has been such questioning of its legitimacy, especially within those countries
that have inadequate representation? But its governance is even more problematic
than that. Consider how decisions about economics are made in most of our dem-
ocracies. Not only does the finance minister sit at the table, but so does a council of
economic advisors, the minister of labor, the minister of trade, the minister of
commerce; everybody sits around the table, even the minister of justice, because there
are often anti-trust issues at stake. The treasury secretary would probably like to try to
make all the decisions himself, but even if he were well intentioned, he is not allowed to
do so. We believe that everybody should have a seat at the table.

But that is not the way that international financial institutions work: it is only the
financial ministers and central bank governors who have a seat at the table. (I
sometimes joke by saying that there is encouragement of a wide diversity of views,
ranging all the way from the governors of the central banks to the ministers of finance.)

10 J. Stiglitz

The outcomes, the policies pushed by the IMF and its modes of behavior, are precisely
what any political scientist would predict, given the governance structure. And unless
we change that governance structure, we will not get fundamentally different outcomes.
All of this might not matter so much if the IMF were just concerned with technical
issues, like the management of check clearing. But the policies that it pushes, that it
insists are conditions for its loans, affect the livelihoods and lives of millions of people,
workers and small businessmen, and not just those who are involved in international
capital markets.

The close link between the decisions that are made and the processes by which those
decisions are made is why it is so important to think together about social justice on the
one hand, and democratic processes on the other. Unless we think very deeply about
how we make a decision, as democracies, we will not change the outcomes of those
decision processes. In the United States, for instance, unless we change the ways that
campaigns are financed, we will change the outcomes: business will continue to exert
undue influence.

There is a second link between democratic processes and social justice. Today we
think about social justice not just in terms of equality of outcomes, but also in terms of
equality of opportunity, equality of voice and participation in decision-making pro-
cesses. When we think about what we mean by democracy in constructing our society,
we should not think only about the results, but about the very processes by which those
results come about.

Improving the public sector. I stressed before the limitations of government and the
limitations of the market. Having understood the limitations of the market and of
government, I believe that we can craft better policies and better institutions to give
expression to our concerns about social justice and democratic processes. For instance,
within government we can use market mechanisms more effectively. One of the most
interesting parts of my stint as Chairman of the Council of Economic Advisors under
President Clinton was my involvement in an exercise that we called ‘reinventing
government’. We sat down with each of the agencies, and we asked three questions: (i)
Was there a role for government here? (ii) If there was a role, what was it? (iii) What is
the best way of performing that role? Do current policies, practices and institutions
reflect the roles that government today should be performing? We were, for instance,
convinced that in many cases we could improve the efficiency and effectiveness of
government through using market mechanisms in government, like auctions and
competitive procurement processes. In a number of instances at least, by introducing
these market mechanisms, we succeeded in making government more efficient and
more responsive to those that they were trying to serve.

Differences among the third ways. These are all areas where I think there is a broad
consensus in the United States both in the left and the right, and probably a broad
consensus in Europe as well, although I think that some of these issues (e.g. concerning
the efficiency of the public sector) have, until recently, not received the attention within

Globalization and the economic role of the state in the new millennium 11

Europe that they have had in the US. There are still some very large differences both
between compassionate conservativism and new democrats, and between perspectives
in Europe and in the US. These differences relate to a number of factors. Partly they
relate to judgments about the magnitude of market failures, and about the ability of
government to address those market failures. But they also relate to values and
principles. I find the high correlation between the judgments concerning the weak-
nesses of markets and the limitations of government and values striking. It turns out
that people who worry more about social justice and inequality seem to have less faith
in the market and more faith in government. And it turns out that those who do not
care much about distribution always have a lot of confidence in the market and much
less confidence in government. This is a correlation that underlies much of the debate.

5. Two general principles: the virtues of competition and no
subsidies

There are two almost universally agreed upon general principles that I first noticed
when I was at the Council of Economic Advisors, but then saw repeatedly while I was at
the World Bank. The first was that everybody believes in no subsidies, everybody agrees
that subsidies are bad, except for their own sector. The second is that competition is good,
that it is the force of competition that makes markets work wonderfully, except in their
own sector; in their own sector they talk about destructive competition that interferes
with stability. (There is a third principle that I will not discuss here: everyone agrees that
transparency and openness are good, except in their own arena.)

5.1 An example: creating a global aluminum cartel

Let me illustrate these principles in terms of two examples that I had to deal with in the
last ten years. On the competition side, I can draw upon an example involving US
Treasury Secretary, Paul O’Neill. He comes from the business community—he was
chairman and Chief Executive Officer of Alcoa, a leading producer of aluminum and
aluminum products, and like everybody else in the business community believes in
markets and competition. In 1993, the price of aluminum started to plummet. There
were three reasons for this: one was a global slow-down; commodity prices tend to be
very sensitive to a global slow-down, and the price of commodities like aluminum
almost always falls. The second reason was linked to Coca-Cola, and more generally to
soft-drink cans. A new technology was invented that allowed production of tin cans
with 10% less aluminum. One of the major uses of aluminum is in soft-drink cans. (In
the United States, there is a tradition among young males that when they finish
drinking a coke or a beer, they squeeze the can to demonstrate their strength. In 1993
there was a strong increase in the strength of the American male. They could squeeze
these cans much more forcefully. What they did not know was that the cans were
actually thinner. The apparent new-found strength made them feel good, and may have
contributed to the confidence in the US economy. But the thinner cans contributed at
the same time to the downfall in the price of aluminum.) The third reason was the end

12 J. Stiglitz

of the Soviet empire, which brought cuts in defense expenditures. Since one of the big

uses of aluminum is making airplanes, although it was great news for the West that

Russia had stopped building airplanes that might have been used to drop bombs on the

West, it was bad news for Alcoa because it meant that there was more aluminum coming

into the markets in the West. We all agreed that Russia should become a market econ-

omy. Russians were not going to be able to sell their cars to America or Europe—their

cars could not compete with those made in Japan, Germany or the United States. One

thing they could produce, that could easily be sold on the market, was aluminum. They

tried to sell it in the West.

As I saw the price of aluminum sinking, I thought, ‘In a few months Alcoa will be

here in the White House asking for something.’ And even faster than I had anticipated,

there they were: Paul O’Neill was at our doorstep. His proposal was simple but daring: a

global aluminum cartel to keep Russian aluminum out of the United States. It put me in

a very difficult position, because I was scheduled to visit Russia to talk about free market

economics to Mr Guidar, the First Deputy Prime Minister of Russia, in charge of eco-

nomics. Guidar started our conversation by talking about hypocrisy—he argued that

Russia was not dumping, and he was right. The United States had talked about Russia

becoming a market economy, but as soon as it could produce something that could

compete, the US government was being brought in to squeeze Russia out of the market.

I could not defend what the United States was doing. One of the most exciting eco-

nomic sub-cabinet meetings during my years at the White House occurred over this

issue. In the end I succeeded in convincing almost everybody that cartels are bad things,

and that we had to open our markets to Russian aluminum. The Russian reformers

were very critical of a cartel, for they knew that such a cartel, by re-establishing quotas,

would be a setback for their reform and a victory for the old guard. But people in the old

Ministry of Trade and Industry were happy with cartel quotas—it was, after all, what

they were familiar with; indeed, they wondered why there had ever been a move to

prices and free markets in the first place. While I was getting phone calls from the

Russian reformers pleading not to go ahead with the cartel, the US State Department

was talking to their old friends in the old-line ministries, who encouraged them to go

ahead with the cartel. The combination of State Department support and pressure from

US special interests—the aluminum industry—was unbeatable: it led to the formation

of a global cartel. At the end of the meeting, the assistant attorney-general for antitrust,

furious at this clear violation of the principles of competition, put the participants in

the meeting on notice that she might have to subpoena them for collusion in violation

of the antitrust laws. Although she never followed through on her threat, she was

right—there had been a real collusion, protected by the umbrella of government, to

restrict competition. Even those of us who were highly critical of the action did not

anticipate the full nature of the disaster, because we did not fully appreciate the Mafia

capitalism that we were helping create in Russia as we helped establish the cartel with its

monopoly rents. Blood flowed in the struggle to gain control of these monopoly rents,

and today, an aluminum monopoly is emerging within Russia.

Globalization and the economic role of the state in the new millennium 13

A general lesson to be drawn from this example is that the state can be an important
force in maintaining competition, but the state can also be used to restrict competition;
and who gets a seat at the table, who is entitled to decision-making power, makes a very
big difference. The consumers, for instance, did not have a seat at the table. That is why
the governance process is so important.

5.2 Corporate welfare: a second example

The second example illustrates the second of the three principles I enunciated earlier
(competition in every sector except one’s own; no subsidies in any sector, except one’s
own; and transparency in every sector except one’s own). Wall Street has been among
the most adamant devotees to these principles. In the midst of the debate in the United
States on welfare reform, some of us said we had to look at corporate welfare. How
could we cut back on welfare to the poor, without cutting back on welfare to the rich,
and to large corporations? But cutbacks in corporate welfare were of considerable
interest to the US Treasury; indeed, they got very upset when we talked about corporate
welfare. They thought such talk was ‘anti-business’, reminiscent of the language of class
warfare. I viewed the issues as simply reflecting principles of equity and economics:
over the preceding years we had seen billions and billions of dollars spent on bail-outs
(including the massive bail-outs of the savings and loan associations), a multiple of the
magnitude of expenditures on welfare for the poor. The same US Treasury that sup-
ported billions of dollars for bail-outs in East Asia—bail-outs that proved ineffective
in stabilizing exchange rates or resuscitating the economies—opposed miniscule pro-
grams to help resuscitate the dilapidated schools in America’s inner cities.

5.3 Improving the public and private sectors and the role of values

To return to my central theme: there are some general principles that should help
inform us in making choices among the alternative third ways. Each country must make
assessments both about the nature of market failures and the nature of the limitations
of its government and political processes, and must come to judgments not only about
the strengths and weaknesses of the public and private sectors, but also about how and
how easily they might be improved. When pressed, many on the right will admit that
there are market failures, but not only do they put greater stress on the government
failures, they express great confidence that market mechanisms can be improved, and
little confidence that the deficiencies in public processes can be remedied. But having
said this, I cannot underestimate the importance of values—both conceptions of
social justice and democratic processes and the importance that is ascribed to them. It is
differences in values which, as much as anything else, drives the assessments of the
relative strengths of the public and private sectors. As a political economist, I must add,
these differences in values reflect to some degree differences in interests; those who
wish to conserve existing power structures and degrees of inequality, who benefit from
that, are more likely to stress the limitations of government, though in practice, when
it serves their interests, they turn to it for assistance, as I pointed out earlier in

14 J. Stiglitz

the discussion of corporate welfare. Those who see themselves left behind by market
processes working on their own naturally turn to collective action, to political pro-
cesses, to remedy their situation.

What is at stake, it must be remembered, is more than a matter of economic
efficiency. It is not just a question of which choices, which among the third ways, leads to
higher GDP. It is even more than a matter of the distribution of income, how GDP is
divided among the citizens of a country. It is a matter of what kind of society we wish to
live in, and to pass on to future generations. Necessarily, that is a question which must
be approached collectively. The decision to rely on market forces is, in itself, a political
action; and indeed, since no society has a policy of relying solely on market forces, every
society is constantly engaging in a debate on the extent to which to rely on market
forces, when to intervene, how to govern these forces. No society can walk away from
these choices.

I have been talking about general principles but these very general principles get
translated into very specific policies. I want to emphasize that this is not just an area of
philosophy, to be debated among academics. The perspectives influence how we
approach each of the major issues facing our society.

6. The role of the state in retirement security1

One of the most important issues facing any society is the issue of retirement security.
The first objective of an old age retirement system is, of course, to provide income
security for the entire population for their retirement. How well it does this is the most
important criteria by which one can judge the adequacy of the system. In addition, of
course, there are some other criteria: (i) efficiency, which means we seek a system that
promotes saving, that does not have an adverse effect on labour supply, and has low
transaction costs; (ii) fairness and equity, to ensure that the poorest people in society
have a basic minimum standard of income while in retirement. In developing countries
there is a further objective, as the social insurance system can play a role in the
development of capital markets. An important point of departure is to recognize that
there will inevitably be an important role for government in the old age retirement
system. Whether that role is a role of running a public system or of regulating a private
system, the fact is that there will be a role. The key issue then is, what is the appropriate
role for the government to play that best meets the objectives and criteria described
above.

One argument reinforcing the necessity of a role for the state in a system that
provides for security for people in their old age is providing security against the risk of
inflation. There is no private insurance system, no private annuity system, in almost any
country around the world that provides security against this risk. When I was Chairman
of the Council of Economic Advisors we spent some time analyzing whether there were

1Much of this section is derived from ‘Rethinking pension reform: ten myths about social security
systems’ and ‘Introduction’ with Peter Orszag, in Holman and Stiglitz (2001: 17–56).

Globalization and the economic role of the state in the new millennium 15

alternatives to provide for security against inflation, for instance investment in stocks,
or in bonds, or a combination of those. There was no single measure or combination
of measures that would provide for adequate insurance against the risk of inflation, at
least as it has been in the past. Recognizing that the private sector has, at the current
time, not provided adequate mechanisms for achieving old age security, and that there
will be a role for government, the question should be, how do we improve the public
provision, not just whether it is possible to replace the public sector with the private
system.2

2Recent discussions of reforming social security have focused on a three-pillar approach—a first pillar,
publicly provided, providing the basic level of support; the third a voluntary private sector. Debate has
centred around the second pillar, often characterized as mandatory, but unlike the first pillar, there is no
redistribution. Most proposals call for this pillar being privately managed but publicly regulated, and to
be a defined contribution system. In a broader view, the second pillar could be either publicly or
privately managed, and could have insurance components, such as insurance against inflation, that
make it little different from an (actuarially fair) defined benefit program. Among the key policy
questions then are (i) who should run the second pillar; (ii) how much ‘insurance’ should be embedded
within it; (iii) what should be the right mix between the first, second and third pillars; and (iv) how do
we manage the transition to having a system in which the second pillar plays a greater role?

As far as the engineering of the transition itself is concerned, one of the advantages of a growing
economy is that one can succeed in the transition by scaling down the relative size of the public pillar
but actually scaling up its absolute size. If you have a basic pension program and if you allow it to grow
in benefits but not to the same extent as the growth in GDP, then the relative size of it will diminish even
if its absolute size will increase. The problems of transition are, accordingly, much less important than
some of the discussions have suggested.

I should also note that the debate about the extent to which the private and the public systems are
substitutes has been a little bit exaggerated. Some of the research in the United States has suggested that
in fact there is perhaps less substitutability and more complementarity between the two.

Finally, elsewhere, I have questioned the dominant presumption in the World Bank and elsewhere
that the second pillar should be privately managed. A government-run program has some marked
advantages over a private system, e.g. in reducing transactions costs (often related to selling costs) and
problems of adverse selection. Still, I think there is a role for the private system. It does not, however,
arise from a desire to minimize risk with diversification, because, at least for those at the bottom of the
income distribution, the public pillar will continue to dominate the private one. Nor am I persuaded by
arguments that the private system allows for more choice about risk-taking: if you consider choice of
that kind as important, you can build that within the public pillar, allowing, for instance, some choice
between a bond fund and a equity fund. But a good reason to have a private third pillar is that different
people have different preferences. Some people want to work hard when they are young and have a
good retirement and other people prefer to enjoy life. There is room for choice and those who want to
have more income in their retirement should have a third pillar to reflect that. The final and most
persuasive argument for enhancing the role of the private sector has to do with the nature of capitalism.
A lot of the funds that are going to venture capital, to new enterprises, are coming out of the private
pension funds, and that involves people making choices of allocations of investment. I think that the
government can invest in equities, but I feel a lot more secure with the government investing in equities
through indexed funds, without deciding which are the good investments and the bad ones. Privately
managed pillars provide for this allocation of capital. But we should not underestimate the problems:
unless there is adequate security provided in the first pillar, the inevitable volatility of prices and returns
to private investments will entail bail-outs in one form or the other; and the anticipation of these

16 J. Stiglitz

6.1 The success of public programs

That having been said, let me make three other observations. The first is that an
appropriately designed public system can meet all the objectives that I described at the
beginning. The US system surely does a reasonable job in meeting all the objectives, and
the mild reforms that are on the table could achieve all the objectives. The US system
has very low transaction costs, there is no evidence of significant adverse effects on
labor supply or on savings, and it does provide a very strong level of old age security of
income. In fact, over the last thirty years the number of old people in poverty has been
reduced dramatically, so much so that today the fraction of the aged population in
poverty is lower than that for the population as a whole. In terms of providing a basic
level of old age security and reducing old age poverty, the US system is working quite
well. There are, to be sure, a few problems (as there are with any program of such
breadth and magnitude) and I will come back to these, but they can be addressed within
the public system. A criticism heard sometimes against the US system and other public
systems is that they do not get as high a return as it is possible to get elsewhere. There are
two responses to that criticism.

6.2 Refutation of critics: are returns in public systems really low?

The first is that if you believe in efficient markets, which most advocates of privatization
seem to do, then in fact the system in United States is efficient: it does provide high
risk-adjusted returns. The returns are those of an investment in treasury bills; to be sure,
treasury bills yield a lower return than equities, but, in an efficient market, the difference
simply reflects a difference in risk. Of course, if you believe that equity markets do not
work efficiently, then you might be able to get higher risk-adjusted returns by investing
in equities. But if so, you have to accept that there is inefficiency in the financial market
and that inefficiency should be in itself a source of concern. It is very hard to argue both
that the markets are efficient and that one can get higher returns by investing in
equities.

Moreover, if you believe that you could get higher returns by investing in equities,
then in fact you should argue that the public old age pension fund should invest in
equities. In the United States all the funds are invested in treasury bills, but there is a
proposal, made by President Clinton, at the suggestion of the Council of Economic
Advisors, that a fraction of the funds, perhaps a third, could be invested in equities. The
big advantage of having public investment in equities as opposed to individual separate
accounts in the private sector is that the downside risk can be better managed through a
public program than through individual accounts. Those who believe that you can do better
investing in equities should recognize that this can be better accomplished through
a public program. In particular, indexed funds eliminate the problem of selecting which

bail-outs will lead to distorted investment decisions (the well-known moral hazard problem). Hence,
the ability of a private component of the social insurance program to contribute to the economy’s long
run economic performance requires the establishment of a truly adequate public first pillar.

Globalization and the economic role of the state in the new millennium 17

fund to invest in—there is very strong evidence that indexed funds do as well as any
managed funds, and there is no evidence that small, individual investors can ‘allocate’
their investments better than indexed funds. The key remaining issue, then, is trans-
action costs, and here public programs (perhaps involving private subcontracting) in
the United States have a strong track record—their transaction costs are low. Indeed,
their track record looks particularly good in comparison with private programs, such as
in the United Kingdom. In sum, well-designed public systems are working well in terms
of the basic objectives of the old age pension program.

6.3 The failures of public systems

The second observation is that it is true that there are, around the world, many badly
designed programs, not only involving high transaction costs but also large deficits. But
the fact that there are some badly designed programs does not mean that we need to
reject public programs. The report Averting the Old Age Crisis issued by the World Bank
(1994) was based on the political statement that what you see in the average or worst
cases is what is going to happen everywhere. But there is no reason for that to be the
case, and evidence in the United States and in a number of other countries shows that
you can have a good publicly managed system. To argue for the abandonment of the
public approach in, say, developing countries is to argue, in effect, that there are some
characteristics of those economies which make it unlikely, if not impossible, to establish
a good public program.

6.4 The failures of private programs

That brings me to the third problem: among private programs around the world, there
are few, if any, examples of good systems in which the private sector is at the center.
Those advocating a movement to the private are really advocating a movement into the
unknown. In an article with Peter Orszag,3 we referred to a study that had been done in
the United Kingdom, which has often been identified as having a good program. Yet the
benefits the old-aged were receiving were reduced by about 40% as a result of trans-
action costs. That is an enormous loss. In that sense a more efficient public program can
provide much better old age security.

Let us take another example. There was a lot of enthusiasm for the Chilean system in
a period when people were investing in the equity market, and the stock market was
booming. People saw their accounts going up year after year. But then came 1997. The
stock market crashed and people did not feel so enthusiastic about the program. People
started recognizing that in fact the transaction costs, though high in the United
Kingdom, were even higher in Chile, which is what one would expect, given the
differing states of development of their capital markets.

6.5 Rethinking the role of the state and the private sector

These two examples have helped motivate rethinking the role of the state in the pro-

3See note 1 above.

18 J. Stiglitz

vision of old age security in developing countries. In countries with very thin capital
markets it is not possible both to invest in your own country and to provide for secure
old age retirement. By investing in US equities, Chile would gain a much greater
stability because the volatility in the United States, which is very high, is still much lower
than in Chile. But many people in Chile do not think that it is good for Chilean
development for their savings to be invested in the United States. There is a real trade-
off between old-age security and savings that will be used to promote the development
of the developing countries. Further, and relatedly, if individuals invest in highly volatile
stocks, or even in stocks that are not so highly volatile, and it turns out at the time of
retirement that the benefits are not enough to sustain a minimum standard of living,
there would inevitably be a bail-out from the public sector. In a sense, what we cannot
walk away from is the fact that in a private system, the public is underwriting individual
speculations in the stock market. There is a public insurance that is not visible when
things are going well and the returns are high, but which will almost be inevitable when
the market is down. The likelihood of a bail-out, and the consequent moral hazard
problem, simply cannot be ignored.

There is an irony in the asymmetry of the inferences concerning past experiences of
the advocates of a private sector program. When these bad experiences within the
private program are noted, they argue that the problems can be fixed. They cannot even
cite a ‘best practices’ example which other countries can emulate. When the bad
experiences within the public system are noted, they argue that the problems cannot be
fixed, even though there are ‘best practice’ examples showing that they can be.

6.6 Further criticisms of public programs: monopoly

Before leaving the issue of the role of the state in old age security, there are two further
problems raised by some people concerning public pension schemes: funding and
monopoly. Let us consider the issue of monopoly first. People find it very disturbing that
there should be a monopoly. We believe in competition, in markets, in choice in other
areas; why in this area should we have a different idea? Few would argue against there
being some substantial scope for choice, and the kind of multiple-pillar system with a
public and a private component that has increasingly become accepted as a basic
framework provides such choice, in the third (purely private) pillar. There is also broad
acceptance that there needs to be a first pillar, providing a basic level of support for the
aged, and that within that public pillar, there is little scope for choice. Hence, the issue is
not whether there should or should not be choice; rather the issue is the relative size of
these different pillars.

The need for a compulsory program: adverse selection. Extreme advocates of privatiza-
tion might dissent from this broad consensus. They ask, why should there be a public
program at all, a public ‘first pillar’, with a government monopoly with limited choice?

There are three answers. The first one involves the problem of adverse selection.
Insurance markets, as any private market in which there are problems of information,
are affected by adverse selection. Everybody would want to provide insurance for the

Globalization and the economic role of the state in the new millennium 19

risks that are good (i.e. low). In the case of annuity markets (pensions are annuities), the
good risks are people who are going to die young. What you would do if you ran a
private annuity program would be to work very hard to find out who are the smokers,
and the people who drink a lot. You would try to encourage them to buy your annuities,
and to discourage the people who do not smoke or do not work very hard, such as
university professors. Thus, the first problem with a basic system that is intended to
cover everybody is adverse selection: each firm tries to shed the bad risks, and retain only
the good risks. The screening/selection process can be very costly and distortionary.

The need for a compulsory public program: redistribution. The second reason for the
basic public pension program is the need for some redistribution. Society does not want
old people to live below the poverty level, no matter what their income is while working.
People are not going to engage voluntarily in redistribution. Redistribution can be
thought of as part of what is sometimes referred to as social solidarity; but it has to be
compulsory for obvious reasons: if everybody has a choice, those with higher incomes
would clearly try to avoid bearing the burden of the redistributive transfers. If there is to
be meaningful redistribution, there must be compulsory participation.4

The need for a public program: risk. The third reason is one to which I have already
alluded: to have an old age insurance that provides for good security one has to have
insurance against the risks of inflation, of bankruptcy of the private company from
which one has obtained insurance, and against other risks that private companies do
not or cannot adequately provide for. That is why there needs to be a public program.

The disadvantages of competition: transaction costs. That having been said, one can still
achieve efficiency in the public sector by designing programs that reflect the advantages
of the competition without the disadvantages. But before coming to that, I wish to make
two more remarks about the disadvantages of the competition inherent in a private
market system. Private systems, as we have noted, have entailed high transaction costs.
The advantage of choosing among securities has a cost, which could be very significant,
because the private firms spend enormous amounts trying to persuade individuals to
enroll in their program. These marketing costs can be very high.

Uninformed consumers. What is very difficult to take into account is the fact that most
individuals in our society still remain very uninformed investors. Studies have been
done in the United States, which is probably one of the more sophisticated investor
markets, to try to ascertain whether people know the difference between stocks and
bonds, between short-term bonds and long-term bonds. Over 50% do not seem to
know the difference between stocks and bonds. It is very hard to understand how they
can make good investment decisions if they do not know the difference between a stock
and a bond. Given our lack of information, private companies are going to spend

4To be sure, this begs the question of whether the entire burden of redistribution should be left to the
tax and general welfare systems. But there are arguments why at least some redistribution should be
conducted through the pension program. See Stiglitz (1999).

20 J. Stiglitz

enormous amounts of money trying to convince people that their particular product is
better. The less scrupulous will try to exploit this consumer ignorance. The firms that
succeed in the market may not be those that are most efficient, in standard economic
terms, but most effective and least scrupulous in exploiting investor ignorance. They
can do so in a whole variety of ways, some of which are honest and some of which are
dishonest. Inevitably, there will be demands for regulation, to prohibit at least the most
egregious practices. But such regulation will not be easy. At a seminar at the World Bank
on pension reform, we invited a representative from the US Securities and Exchanges
Commission, and to our question regarding the Commission’s ability to regulate these
problems, she responded negatively. In effect, she said,

We can regulate against outright fraud, we can protect investors against
some abusive practices but we cannot provide the kind of regulatory
structure that would be required to address the real concerns of protecting
investors, especially those who are not well informed, that one would
inevitably face in designing a private social insurance system for retirement
appropriate for providing old age security.

These are some of the problems that one would encounter within a private system.
Of course, there is enormous pressure for a private system. The amounts that are
transaction costs from the point of view of consumers or investors are incomes from
the point of view of the financial community. Those of us who are concerned about
consumers and old people dislike transaction costs, but people in the financial
community like them; they constitute that sector’s income and profits.

Using competitive mechanisms to design a more efficient public system. Can we design a
public system that systematically and with some assurance leads to efficiency in general,
and low transaction costs in particular? There are two possible alternatives. One of
them is called bench-mark competition. We know how much the transaction cost
should be in an efficiently run system. We know, for instance, how much it costs to run a
portfolio in the most efficient system, as we have competition in portfolio management,
and we can use that information to establish bench-marks. We can use bench-mark
competition to provide guidelines about how well the public sector is working. Some
people have even advocated the use of competition for the management of transaction
services within the public sector. On the side of portfolio management, the current US
system entails investment in US government securities, with essentially no transaction
costs. Assume, as noted above, the United States decided to move part of its portfolio
into equities. We know how much it should cost to manage portfolios of indexed funds;
we know how to reduce transaction costs to a very low amount: there are some funds in
the United States, like Vanguard, that have brought the cost of managing a stock
portfolio down to about nine basis points, while many mutual funds are charging
100–200 basis points. If the public sector cannot guarantee low transaction costs in
portfolio management, one can put this part of its activities out for competition. More
generally, one can have competition in the provision of transaction services, in the

Globalization and the economic role of the state in the new millennium 21

various parts of the public system, without having competition in the system as a whole.
This is an example of how we can use market mechanisms within the public sector to
increase its efficiency.

6.7 The role of pre-funding

One of the criticisms of public programs is that all too often they are pay-as-you go,
rather than prefunded. But the issue of funding is completely separable from the issue
of management. One can have public pre-funded programs.

Different systems are appropriate for different countries. More generally, different
economies, facing different situations, need different kinds of systems: the role of
pre-funding and of fully funded systems could differ in different economies. I argue
quite strongly that in the case of developing economies that do not yet have a social
insurance system and are just starting, particularly when they have a dire need for
capital, having a fully funded system makes a great deal of sense. For an economy that
already has a pay-as-you-go system, the transition to a fully funded system could pose
very serious problems.

Much of the discussion regarding private versus public systems, fully funded versus
pay-as-you-go, has been very misleading. The advocates of fully funded private systems
often give a distorted view of the relative merits, underestimating the transition costs,
the risks and the transaction costs. They have assumed that there is a more informed
investor than in fact there is, and they have exaggerated the returns that are likely to be
obtained in a private system. For instance, the numbers Feldstein and Ranguelova
(1998) have used as returns on equities are not credible: if they could really guarantee
the returns they assume, I would gladly give them my money to invest. Moreover,
whatever return one could guarantee private investors, surely the government, with its
highly diversified portfolio and lower transactions costs, also could attain.

Reforming the US system. As I said, different countries need different systems and one
needs to adjust the system to the particular context of the economy, paying special
attention to demography. I do not claim to know enough about the Italian situation to
suggest what should be done there, but I have studied the US system quite extensively
and I have come very strongly to the conviction that for the United States, minor
reforms to the current system of pay-as-you-go would achieve all the objectives that I
stated in the beginning. Let me briefly describe the two minor reforms that I believe are
needed. The major problem confronting the US system is the fact that the system will
run into financial problems some time in the next century. If the boom that has
occurred in the last five years, with productivity growth of 4% or more, continues, the
financial position will be markedly different, and more positive. If the surplus
projections are accurate, then in fact the social insurance system will also be in a much
better situation than was previously thought to be the case. My own view is that the
United States needs to make adjustments, e.g. in the retirement age, and in the cost of
living indexes (which almost surely overstate the rate of inflation). Relatively minor

22 J. Stiglitz

adjustments in those directions would put the US system basically in fiscal balance. The
partial privatization proposal that President George W. Bush proposes would actually
undermine the fiscal viability of the current US system and will present serious
problems in the first third of this century, because that proposal will take part of the
revenues that are needed to provide balance and turn them over to the private sector.
That will leave a huge hole in the system. Moreover, the proposal does not really
adequately address either the issues of transaction costs or the regulatory issues that I
described earlier.

It is important to develop a social insurance system that reflects our views of social
justice and that takes into account individual responsibility and choice. For the United
States and for many other industrialized countries, the appropriate course is reforming
the existing system, increasing fiscal balance and addressing some of the particular
design features that bring inefficiencies, and sometimes inequities, into the system. But
I would argue that it is much easier to make these reforms than to redesign and provide
a private system that would meet the objectives that I set out at the beginning.

Going forward, there are other, more important reforms that should be on our
agenda. One reform that we ought to be discussing in the coming decade, as soon as we
get the current pension reform in place, is the building of an integrated social insurance
system that brings together not only retirement, but also unemployment insurance,
healthcare and a broad array of other social insurance needs.

7. Other dimensions to the third way and the economic role of
the state

I have perhaps dwelled too long on this example, but I have done so because it nicely
illustrates the controversies involved in the choices facing the third way. Everyone agrees
that there is a role for the state in providing old age security. Everyone agrees that there
is a role for the private sector. But they do not agree about what constitutes the right
mix. Hidden in the debate are a host of issues— judgments about markets and how they
work, judgments about government and how it works, and judgments about how
markets and governments can be improved—as well as conflicting values. And while
much of the debate proceeds as if all participants have nothing but the general interest
at heart, it is apparent that here, as elsewhere, special interests are at play.

7.1 Competition policy

Coming back to other areas, competition policy remains a subject of great concern.
Again, everyone recognizes that there is a role for government. The huge price-fixing
conspiracies that have been uncovered in the last eight years show that there is still a
need for active law enforcement. But there are those who are less worried than I am
about monopolization and the abuses of market power. It was only with the Clinton
administration that there was a resolve to go after predatory pricing, say in the airline
industry, and the predatory practices of Microsoft. What happens to Microsoft, in

Globalization and the economic role of the state in the new millennium 23

particular, could have a very big impact on the ‘new economy’, and more broadly, on the
structure of the global economy for decades to come.

7.2 Regulatory policy and regulatory loopholes

Another example where there are competing interpretations of the third way, of what
should be the role of government, concerns financial market regulation. Again,
everyone recognizes that there is a need for government regulation; there are few
advocates today of free banking. But there are those who wish to go as far as they can in
stripping away regulations, regardless of the cost. In the United States, we saw the
consequences in the form of the savings and loans débâcle, but the global financial crisis
is now widely recognized to have been a consequence, at least in part, of misguided
deregulation efforts. The question should have been: what is the right regulatory
structure, not what is the minimal regulatory structure.

Offshore banking centers present a particularly vexing issue. Why do they exist? Is
there something about an island that makes it more suitable for banking? Do the
breezes that waft through the islands make bankers more able to engage in their
banking functions? I have not been able to understand why islands are particularly good
for banking.

Joking aside, we all know the reasons for offshore banking. It is a way of avoiding
taxes and regulations. But why have taxes and regulations, if at the same time you open
up these loopholes for people to avoid these taxes and regulations? We all know
the answer to that question too. These are not loopholes left by mistake. These are
loopholes that are put there for specific reasons, at the behest of special interests. Our
commitment to addressing those problems depends on your views of democratic
processes and social justice. If we have government run by and for special interests,
these loopholes will remain.

7.3 The environment

There are other examples where visions of the third way differ markedly: for instance,
on the environment. Today, everyone recognizes the need for governments to protect
the environment. But some take this obligation—a form of intertemporal social
justice—more seriously than others. Do we need to put our emphasis on conserving the
use of oil-based energy, or do we want to expose Arctic wildlife to risks that could
destroy the environment? We have recently seen what oil is doing to one of the most
important environmental preserves of the world, the Galapagos Islands. Do we want
that to happen in the Arctic?

7.4 Macro-economic policy and the independence of central banks

One last topic that helps illustrate the general principle that while there is now a
consensus on behalf of an important role for the government, there is not a consensus
either about that role, or about the importance of democratic processes and social
justice. At least since Keynes, there is almost universal agreement that a central
responsibility of government is maintaining macro-economic stability. Markets, as

24 J. Stiglitz

wonderful as they may be, are not ‘self-adjusting’ in ways that ensure either full
employment or price stability. That having been said, two questions remain hotly
debated: what should be the objective of monetary policy, and how accountable should
those responsible for monetary policy be through democratic processes? In the United
States, monetary policy has three objectives: controlling inflation, maintaining full
employment and promoting growth. In many parts of the world, countries have been
persuaded that the objective of monetary policy is just controlling inflation, with no
concern about employment or growth. In some quarters, it has become accepted that
this is good economic policy. But in fact, there is no economics behind this; this is
politics. A single-minded focus on inflation may lead to lower rates of inflation (it
would be a strong rebuke to monetary policy if it did not), but it does not necessarily
lead to higher employment or long-term growth—to better performance in the real
variables. Lower inflation may, to be sure, benefit creditors; but if the lower inflation is
obtained at the expense of higher unemployment, the benefits to the creditors come at
the expense of workers.

The necessity of an independent central bank that is not democratically accountable
has also become part of the mantra in many parts of the world. There is no issue of
more concern to the people in most of the world than their jobs, and monetary policy
has a very large effect on that. Why is it that, on the one hand, we tell countries
democracy is very important, but on the other hand, when it comes to the most issues
that are most important to them, jobs and employment, we say: this is too important to
be entrusted to democratic processes; you should have an independent central bank?

My own view is that the degree of independence is something which democracies
should debate. In some countries a more independent central bank is a good idea, while
other countries do not need an independent central bank. India has had a very stable
macro-policy, without inflation, and has not had an independent central bank. Russia
today has an independent central bank that is being used to transfer billions of dollars
out of the country into the hands of the oligarchs. For Russia, independence has not
provided a solution to its problems.

The important points that I want to make is that the issue of independence itself
should be part of the democratic debate, as should the issue of what should be the
objective of monetary policy. What is at issue are matters of social justice and demo-
cratic processes.5

8. Concluding remarks
I have tried to convince you today that while we all accept the third way, between
socialism and laissez-faire, while we all recognize that there is a role for government—
and an important one at that—and a role for markets, there remain some very
important issues in dispute. Those of us who are committed to the principles of demo-

5In particular, an independent central bank focusing on controlling inflation should not be imposed on
countries as part of conditionality of assistance, as the IMF has repeatedly done.

Globalization and the economic role of the state in the new millennium 25

cratic processes and social justice are committed to seeing those principles translated
into economic policies that will make a real difference to people’s lives. There is an
economic theory, an empirical basis, a scientific basis behind policies calling for more
than a minimalist role for government. For too long the ideology of the right has driven
the definition of the appropriate economic role of the state. The time has now come to
try to formulate some alternative visions of the economic role of the state in this
century, visions based on the use of economic science, but motivated by a commitment
to social justice and democracy.

Address for correspondence
Joseph Stiglitz, Graduate School of Business, 814 Uris Hall, 1403 IAB, Columbia
University, New York, NY 10027, USA.Email: jes322@columbia.edu

References
Chandler, A. D. (1977), The Visible Hand: The Managerial Revolution in American Business.

Belknap Press: Cambridge, MA.

Feldstein, M. and E. Ranguelova (1998), ‘Individual risk and intergenerational risk sharing in an

investment-based social security program,’ NBER Working Paper no. W6839.

Holman, R. and J. Stiglitz (eds) (2001), New Ideas about Old Age Security. World Bank: Washing-

ton, DC (presented at the conference on ‘New Ideas about Old Age Security,’ Washington, DC,

14–15 September 1999).

Stiglitz, J. (1999), ‘Taxation, public policy, and dynamics of unemployment,’ in International Tax

and Public Finance, vol. 6. Kluwer: Boston, MA, pp. 239–262.

World Bank (1994), Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth,

World Bank Policy Research Report. Oxford University Press: Oxford.

26 J. Stiglitz

What Will You Get?

We provide professional writing services to help you score straight A’s by submitting custom written assignments that mirror your guidelines.

Premium Quality

Get result-oriented writing and never worry about grades anymore. We follow the highest quality standards to make sure that you get perfect assignments.

Experienced Writers

Our writers have experience in dealing with papers of every educational level. You can surely rely on the expertise of our qualified professionals.

On-Time Delivery

Your deadline is our threshold for success and we take it very seriously. We make sure you receive your papers before your predefined time.

24/7 Customer Support

Someone from our customer support team is always here to respond to your questions. So, hit us up if you have got any ambiguity or concern.

Complete Confidentiality

Sit back and relax while we help you out with writing your papers. We have an ultimate policy for keeping your personal and order-related details a secret.

Authentic Sources

We assure you that your document will be thoroughly checked for plagiarism and grammatical errors as we use highly authentic and licit sources.

Moneyback Guarantee

Still reluctant about placing an order? Our 100% Moneyback Guarantee backs you up on rare occasions where you aren’t satisfied with the writing.

Order Tracking

You don’t have to wait for an update for hours; you can track the progress of your order any time you want. We share the status after each step.

Order Now Talk to Us

Areas of Expertise

Although you can leverage our expertise for any writing task, we have a knack for creating flawless papers for the following document types.

Essay

Thesis

Presentation

Dissertation

Term Paper

Research Paper

Book Review

Assignment

Report

Case Study

Letter

Article

Coursework

Speech

Q & A

Critical Thinking

Areas of Expertise

Although you can leverage our expertise for any writing task, we have a knack for creating flawless papers for the following document types.

Essay

Thesis

Presentation

Dissertation

Term Paper

Research Paper

Book Review

Assignment

Report

Case Study

Letter

Article

Coursework

Speech

Q & A

Critical Thinking

Trusted Partner of 9650+ Students for Writing

From brainstorming your paper's outline to perfecting its grammar, we perform every step carefully to make your paper worthy of A grade.

Preferred Writer

Hire your preferred writer anytime. Simply specify if you want your preferred expert to write your paper and we’ll make that happen.

Grammar Check Report

Get an elaborate and authentic grammar check report with your work to have the grammar goodness sealed in your document.

One Page Summary

You can purchase this feature if you want our writers to sum up your paper in the form of a concise and well-articulated summary.

Plagiarism Report

You don’t have to worry about plagiarism anymore. Get a plagiarism report to certify the uniqueness of your work.

Free Features $66FREE

Most Qualified Writer $10FREE
Plagiarism Scan Report $10FREE
Unlimited Revisions $08FREE
Paper Formatting $05FREE
Cover Page $05FREE
Referencing & Bibliography $10FREE
Dedicated User Area $08FREE
24/7 Order Tracking $05FREE
Periodic Email Alerts $05FREE

Our Services

Join us for the best experience while seeking writing assistance in your college life. A good grade is all you need to boost up your academic excellence and we are all about it.

On-time Delivery
24/7 Order Tracking
Access to Authentic Sources

Academic Writing

We create perfect papers according to the guidelines.

Professional Editing

We seamlessly edit out errors from your papers.

Thorough Proofreading

We thoroughly read your final draft to identify errors.

Thorough Proofreading

We thoroughly read your final draft to identify errors.

Delegate Your Challenging Writing Tasks to Experienced Professionals

Work with ultimate peace of mind because we ensure that your academic work is our responsibility and your grades are a top concern for us!

Check Out Our Sample Work

Dedication. Quality. Commitment. Punctuality

It May Not Be Much, but It’s Honest Work!

Here is what we have achieved so far. These numbers are evidence that we go the extra mile to make your college journey successful.

0+

Happy Clients

0+

Words Written This Week

0+

Ongoing Orders

0%

Customer Satisfaction Rate

Process as Fine as Brewed Coffee

We have the most intuitive and minimalistic process so that you can easily place an order. Just follow a few steps to unlock success.

Call Us +1 (877) 657-8180 Discuss Order Details Now

See How We Helped 9000+ Students Achieve Success

We Analyze Your Problem and Offer Customized Writing

We understand your guidelines first before delivering any writing service. You can discuss your writing needs and we will have them evaluated by our dedicated team.

Clear elicitation of your requirements.
Customized writing as per your needs.

We Mirror Your Guidelines to Deliver Quality Services

We write your papers in a standardized way. We complete your work in such a way that it turns out to be a perfect description of your guidelines.

Proactive analysis of your writing.
Active communication to understand requirements.

We Handle Your Writing Tasks to Ensure Excellent Grades

We promise you excellent grades and academic excellence that you always longed for. Our writers stay in touch with you via email.

Thorough research and analysis for every order.
Deliverance of reliable writing service to improve your grades.

Place an Order Start Chat Now

the role of the state and its governance in the context of a country’s economic development presentation

What Will You Get?

Premium Quality

Experienced Writers

On-Time Delivery

24/7 Customer Support

Complete Confidentiality

Authentic Sources

Moneyback Guarantee

Order Tracking

Areas of Expertise

Essay

Thesis

Presentation

Dissertation

Term Paper

Research Paper

Book Review

Assignment

Report

Case Study

Letter

Article

Coursework

Speech

Q & A

Critical Thinking

Areas of Expertise

Essay

Thesis

Presentation

Dissertation

Term Paper

Research Paper

Book Review

Assignment

Report

Case Study

Letter

Article

Coursework

Speech

Q & A

Critical Thinking

Trusted Partner of 9650+ Students for Writing

Preferred Writer

Grammar Check Report

One Page Summary

Plagiarism Report

Free Features $66FREE

Our Services

Academic Writing

Professional Editing

Thorough Proofreading

Thorough Proofreading

Delegate Your Challenging Writing Tasks to Experienced Professionals

Check Out Our Sample Work

It May Not Be Much, but It’s Honest Work!

0+

Happy Clients

0+

Words Written This Week

0+

Ongoing Orders

0%

Customer Satisfaction Rate

Process as Fine as Brewed Coffee

Share Your Requirements

Place Order & Deposit Funds

Release Payment to Your Writer

See How We Helped 9000+ Students Achieve Success

We Analyze Your Problem and Offer Customized Writing

We Mirror Your Guidelines to Deliver Quality Services

We Handle Your Writing Tasks to Ensure Excellent Grades