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World Bank: Role of Governments Central, Not Vital, To Development

Washington, 12 February 1997 (RFE/RL) - Joseph Stiglitz went this week from being Chairman of the U.S. President's Council of Economic Advisors on Monday to Chief Economist of the World Bank on Tuesday, and jokes that having solved America's economic problems he was now ready to fix the world's.

Yet, in his more serious moments, Stiglitz says the American experience has some very good lessons because, almost unnoticed, the United States has been going through a transition process that is now sweeping the world.

"We sought the middle," says Stiglitz, between the old view that the government has "a huge responsibility for managing the economy and for peoples lives, on the one hand, and the view of what I call Reaganomics, on the other hand, which says there is very little role for government."

He says the middle is where "individuals and markets and enterprises are at the core of the economy, but individuals draw upon communities for strength" and depend on the government's vital role, not to replace markets but to compliment them and keep them honest.

Stiglitz spelled out his views to a small group of financial journalists invited to join him on his first day at the World Bank as Chief Economist and a Senior Vice President.

"This is a very exciting time for me to come to the bank," says Stiglitz, because the bank is in the process of redefining itself to more closely reflect these new "middle" ideas which he says are "achieving increasing resonance around the world."

He says the U.S. experience in opening up the telecommunications, electric power and banking industries is a prime example of a change from 40 years ago when everyone assumed infrastructure was the responsibility of governments alone. But he says today "we recognize that many of these key areas of infrastructure can in large part be provided privately if the government has in place the right regulatory structure."

Stiglitz says establishing the proper rules and regulations allows the generation of "an enormous amount of private capital" as well as a lot of competition. "We reduced the role of government, but it doesn't mean just naive deregulation -- that we've just thrown away the rules -- because there are still elements of natural monopoly" that some in the private sector might take advantage of.

Stiglitz says the shift in the United States on infrastructure is part of the next wave the bank is now working on with countries around the world -- to allow the private sector to come in and use their capital, have competition, and generate this important aspect of infrastructure.

Stiglitz says there are some basic lessons for East and Central Europe and the former Soviet Union that must be kept in mind as they work through their more complex transformation. First, he says, is the institutional infrastructure underlying a market economy.

He says: "A market economy is not just enterprises and firms -- there's a legal structure, a structure in which you have enforcement of contracts ... you have a whole set of institutions and ways of interacting that provide the basis for how a market economy operates."

Stiglitz says even people in the west take this underlying infrastructure for granted, but that it is vital and takes awhile to build up.

Secondly, says Stiglitz, the nations in transition must make sure that there is a safety net in place to help those adversely affected by the transition. The need for a safety net is absolute in all countries, rich or poor, and the more so in the economies in transition because they are changing social and economic structures at the same time very rapidly.

Last but not least, says Stiglitz, the countries in transition must stick to democratic processes and get the support of the population for changes as they are implemented. "One of the things democratic leadership involves is mobilizing that support," he says.

Stiglitz says he wants the bank to continue to push for a world trading system without barriers and for every nation to realize that the sooner they allow their domestic industries to face the tough competition on world markets, the stronger they will be.

Again looking at the U.S. experience, Stiglitz points to the steel industry, which had a tremendous turn-around in the 1990's. He says the U.S. lowered its tariff and other barriers to steel and the long-dominant American steel industry could not compete.

As a result, he says a whole new industry developed using mini-mills, which are now the most competitive in the world. "If we had created tariff barriers, these mini-mills would not have even been invented and we would have preserved an inefficient steel industry," he says.

But what about the communities where thousands of steel workers lost their jobs as a result? he asks rhetorically. The answer, he says, is that unemployment in those areas is now below national average because the communities themselves went through a transformation.

Stiglitz says new industries came in and were created and they are more productive and now provide more jobs and more economic growth than the steel industry could have ever hoped to accomplish.

"It was hard for some of the people," says Stiglitz, himself the son of a steelworker in one of those towns in the central United States, but he says this underscores the need of a safety net to help people move from one job to another, to facilitate the changes.