Nobel Laureate Joseph E Stiglitz had predicted the global financial crisis and talked about its impact on emerging economies like India and China three years ago. In this interview with Rajesh Kurup at his Manhattan residence, Stiglitz says the crisis will last a couple of years. Excerpts:
What led to the present financial crisis?
The most superficial problem is the meltdown of the credit market due to bad lending. The particular precipitating event is the decision to shut down Lehman Brothers, which was analogous to International Monetary Fund's decision in Indonesia in 1997. IMF, influenced by the US Treasury, had shut down 16 banks in Jakarta and announced shutting down more banks, resulting in a run on banks in that country.
US Treasury Secretary Henry Paulson has made the same mistake. He closed down one bank — Lehman Brothers — and said more would follow suit, and did not provide guarantees for the deposits. This resulted in a collapse of the financial markets. This is an example of unbelievably bad economic policy.
Can we equate the present crisis with the Great Depression of 1929 or the dotcom bust of 2000?
The present crisis is not as bad as the Wall Street meltdown of 1929, even though it's much worse than the dotcom one. The reasons are that the present economy is largely a service sector-based one unlike during the Great Depression. The gravity of the situation depends on how well the US government acts. The present crisis is either the worst in 25 years or in the past 75 years, but not the worst in the last 100 years.
You saw this coming and had also warned the government...
Yes, some economists like Paul Krugman (this year's Nobel Prize winner for economics) and I had predicted the crisis at least three years ago. Sadly, the government didn't listen to us.
How long do you expect this crisis to last?
You cannot answer that question without knowing what the government is planning to do. Europe is going into recession, and India is also having problems. So if it is a global slowdown, we won't be able to export our way out of the downturn. I am rather pessimistic; I think it will last a couple of years.
How safe is India from this recession?
The crisis is likely to affect countries that were foolish enough to open up their financial services industry to foreign banks. That way India is relatively insulated from the recession. However, China — which has strong internal controls — is unlikely to be hit.
In India what do you think policymakers should focus on — growth or inflation?
I think inflation is more important, but focusing on inflation is not the only thing to be done. Growth is also important and it should not be completely ignored.
