Stiglitz’s Mubiru Memorial Lecture

Failure to define the necessary market regulation deprived lecture of the necessary nuance

The lecture by economics Nobel laureate Joseph Stiglitz about the failures resulting from deregulation of financial markets in the United States and the need for a strict regulatory regime was engaging and frustrating at the same time.

The main pillar of Stiglitz’s argument that unregulated markets tend to have harmful social consequences was obvious. His counter argument that there was need for regulation lacked nuance. The lecture presented a bi-polar world: on one hand are people who oppose regulation whom Stiglitz called “free market fundamentalists.” On the other hand are people who want regulation – Stiglitz being one of them. By doing this, Stiglitz fell into the same trap as the people he sought to criticise – of being too ideological.

The major weakness of the lecture was its inability to define regulation and thereby demonstrate the complexity of the subject. So he presented regulation as if it was a black box. Any meaningful debate about regulation has to begin by opening the black box so that we see its contents. This is because the arguments for and against regulation in America often don’t illuminate the salient issues. Instead ideologues on either side just shout at each other. This has made the debate stale.

First of all, except for some extremist fringe, even the most ideological zealots of deregulation are not suggesting that the USA does away with the Securities and Exchange Commission, the Federal Reserve and many other regulatory agencies.Government regulation of the market is a given. Therefore, Stiglitz needed to clearly define the specific forms of deregulation that he felt were socially harmful. Second, the issue cannot even be how much or how less to regulate. That is a blind debate. The debate has to be on the type of regulation sought.

The deregulation movement of the 1980s and 90s was not born of out of the blue. From 1954, Western nations put in place myriad regulatory policies and institutions. This led to the growth of bloated bureaucracies with accompanying rental havens for government officials. It also emasculated the free operation of market forces, stifled innovation, undermined competition, killed creativity and facilitated the growth and dominance of monopolies and oligopolies. This in turn led to sluggish growth and rampant inflation in the 1970s.

The attempt to resolve these distortions came with its ideological justification. The neo-liberal movement (as it came to be called) sought to justify reforms through an ideological attack on government. Its most fervent advocates sought to discredit all forms of state involvement in the economy. The swing was therefore from one extreme spectrum of the ideological debate to another: from an obsessive faith is state action to a fanatical faith in the invisible hand of the market.

I had hoped that Stiglitz would transcend this ideological straight jacket and therefore tell us the specific forms of regulation that hinder private enterprise growth and stifle innovation. These regulations needed to be removed. Then I thought he would tell us the specific regulations that tend to protect society against the recklessness of private economic agents without undermining innovation and creativity. Even here I expected him to temper his argument with a caveat: that the fact that markets fail does not necessarily mean that state intervention would automatically produce better results.

The lecture was therefore too narrowly focused and ideological to illuminate the challenge we face. For example, Stiglitz recommended state intervention in the economy, something all states do. The issue is not whether or not to get states involved. It is not even how much or how less they should be involved. The issue is what specific forms of involvement are necessary for success. Yet even here, we cannot have a one blue print for all nations.

States are not generic. They vary in terms of their institutional capabilities and in their politics (by politics I mean how the different constituent social forces relate to the state). Some states are better than others at performing particular functions. There are many state functions that work well in Norway but would become dysfunctional if transplanted to the US because of the differences in their institutions, politics, cultures and other social endowments. Hence, one size cannot fit all.

Thus, I was constantly frustrated that most ofStiglitz’s lecture was devoted to showing how free markets do not always work as their advocates claim. Of course I agreed with him that the argument for free markets assumes perfect competition among firms, perfect mobility of factors of production, perfect information among consumers etc. These assumptions do not exist in real life because of imperfect competition, structural barriers to entry and exit of firms into an industry and information asymmetries.

The problem is that Stiglitz fell into the temptation of imagining that because free markets have an inherent tendency to simulate certain pathologies, then state intervention to correct market failures would work – as a matter of course. I felt like standing up to give a counter lecture – with a zillion examples – of how state intervention to correct market failures has often ended up creating its own dysfunctions. Sometimes the social consequences are worse than those of free markets.

To bring this argument to Uganda, the free market has failed to deliver many public goods and has actually often had harmful social effects. However, the state we have in this country, with its institutionalised incompetence, corruption and other dysfunctions would not be the perfect instrument to correct many failures I see in the market. Even then, there are particular public functions that the state in Uganda performs well (like resource allocation through the budget) and functions (like delivery of public goods and services to ordinary citizens) which it performs badly.

Therefore, the solution for Uganda, for example, would be how to leverage its strength (allocative efficiency) while avoiding its weaknesses in implementation of government programs. This would lead us to separate the provision of public services from their financing. The government would remain involved in the economy by financing education, health, agricultural extension services, roads and energy. However, as far as possible it should concession out the delivery of these services to the market.The issue is not one of state versus market but how to use both within our specific context.

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