Stiglitz warns against IMF “Inflation targeting”

Nobel economics laureate Joseph Stiglitz warned in Maputo on Thursday against following advice by the International Monetary Fund (IMF) that would make the fight against inflation the number one priority of economic policy.

Addressing an overflowing public meeting organised by the anti-corruption NGO, the Centre for Public Integrity (CIP), Stiglitz, who is also a former chief economist at he World Bank, said he had been “appalled” to discover that the IMF wants to impose “inflation targeting” on Mozambique.

He argued that, while low inflation might be desirable (and he praised the Bank of Mozambique for its handling of inflation, currently at historically low levels), it could not be the main goal of economic policy, which should also take into account such considerations as growth and employment.

The main weapon against inflation has always been interest rates – but high interest rates risk destroying small and medium sized businesses. Stiglitz noted that the interest rates charged by Mozambican commercial banks are already far too high, and that is in a situation of low inflation.

The crippling impact of high interest rates could be ameliorated where there is an alternative to the commercial banks. Stiglitz noted that Brazilian banks also charge exorbitant interest rates – but this does not damage the Brazilian economy, since Brazil has a development bank, the BNDES, controlling more resources than the World Bank does, which can provide cheap loans to businesses.

Stiglitz warned against excessive concentration on natural resources (such as the coal and natural gas that Mozambique possesses in abundance). Countries dazzled by their resources had often fallen victim to the “resource curse” – their growth rates were slower than those of countries without resources, and their societies were much more unequal. Stiglitz warned that inequality is damaging, and that “by creating a more equal society, you can have a stronger economy”.

He cited the case of Venezuela before the rise to power of the populist leader Hugo Chavez. Then, despite Venezuela’s oil wealth, 60 to 80 per cent of the population lived in poverty. Venezuela had not prospered as well as, for example, Costa Rica, a Latin American country with very few natural resources.

The “resource curse” was not inevitable – among the countries that had used their resources well, Stiglitz said, were Botswana, Norway, Malaysia and Chile.

He pointed out that, despite all talk of “win-win” solutions, there are fundamental conflicts involved in natural resource exploitation – notably between private business and the public interest. While private mining companies always want to pay the lowest possible price for the resources, it is in the public interest that they should pay the highest possible price.

Stiglitz favoured heavy taxes on mining companies, and insisted that in the long run countries can only benefit from their resources under the ground if they invest the money those resources earn in facilities for the public good above the ground.

“You can govern by depleting resources”, Stiglitz said. “But if you don’t invest the money above the ground, you become poor. You diminish your future”.

He also warned of the “Dutch disease” – the phenomenon whereby an increase in revenue from natural resources makes the local currency stronger, and thus damages manufacturing, since the country’s industrial exports become more expensive. This leads to companies closing down and the loss of jobs.

Stiglitz urged against overvaluing the currency, and suggested that overvalued exchange rates were among the reasons for the de-industrialisation that had happened in Africa over the past quarter of a century.

He also called for better contracts, and if necessary the renegotiation of contracts. He regarded as nonsense the idea that contracts are sacred. “Renegotiation has always been part of capitalism”, he pointed out.

Stiglitz noted that the Botswana success story began with renegotiating the unfair contract that the South African diamond company, De Beers, had secured prior to Botswana’s independence. De Beers had initially protested, but eventually came to agree that a fairer contract was in its interests as well as those of the Botswanan public. Among other countries that had successfully renegotiated contracts were Australia, Bolivia and Venezuela.

Contracts should also clearly hold companies responsible for environmental damage. “You have to remember – the companies have good lawyers”, he said, “and they’re thinking ‘If things go bad, how do we ensure our shareholders don’t lose money?’”.

Post published in: Africa News

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