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State companies should not have been destroyed during privatisation process; they should have been transformed
ALPBACH- Russia could actually earn more from the sanctions. It took us a year to realise that and to work on price limit for the Russian oil. For example, the oil problem is not a big deal if all countries in the world refuse to by it from Russia, but if only the West refuses to buy it and they can sell it to China and India, then there is a weak effect. It only changes where the oil is transported and who bought it from whom, but the price is the same. It does not change anything in Russia. And we should have known that from the beginning.
Nobel Prize winner Joseph Stiglitz said this in an exclusive interview for CAPITAL, answering a question about the impact of sanctions on the Russian economy.
The former vice-president and chief economist of the World Bank answered CAPITAL’s questions about the policy of neutrality; why the West says that the Chinese are foul players, and why the privatization process failed in the former Yugoslav countries.
CAPITAL: When did you think for the last time that the world is in order, that everything is still all right?
Stiglitz: There was a lot of optimism when the Soviet Union fell apar, the fall of the Iron Curtain. There were people who wrote as if it was the end of history. So, there was a lot of optimism. We knew how to achieve common progress and democracy.
CAPITAL: How do you see the situation in the world thirty years after?
Stiglitz: I think we saw two things. One of them is neoliberal ideas, which prevailed after the fall of the Iron Curtain. They were wrong. They were known to be wrong in terms of economic theory. We knew that markets in general did not work as the advocates of those ideas claimed. We knew we had misinterpreted the fall of the Iron Curtain as a victory, as proof that free markets were wonderful, when actually it was proof that communism was terrible.
We misinterpreted success and, as I said, my paper, which I wrote before 1989, showed the markets’ limitations, but there was euphoria because the communism ended. We all saw free markets as great. And the other thing which we missed is that authoritarian regimes can use market mechanisms and that worked well in the short term, for thirty or forty years. For example, China is progressing very successfully, reducing poverty, but it is not becoming democratic.
CAPITAL: Doesn’t that sound like a joke? Communist China to be the biggest winner of the market games?
Stiglitz: You could say it is ironic. But it is also ironic, although not a surprise, because I warn in my books “Globalization and Its Discontents” and “The Price of Inequality” that the globalization would lead to additional inequality or that it could lead to it in some countries. And that increased inequality could lead to serious political consequences, which is what is happening, unless we reduce it, unless we take certain steps to compensate for it, and this is where those who advocate globalization make the biggest mistake. They think that tax cuts for the rich will benefit the state, that the poor in that state will benefit, and that's not true.
CAPITAL: What could the deglobalization process look like?
Stiglitz: One of the globalization problems was that tariffs were quickly removed, leaving many people unemployed instead of getting more productive jobs for them. The system did not move people quickly enough from a low level of production to a high level of production, but from a low level to unemployment. It was bad for the economy and for individuals. We could face the same problem during deglobalization, that rapid changes will be very difficult for economies to accept, but the results will be slightly different. Trump's threat that the tariff on Chinese products will be increased to 50-60 percent increases the prices for Americans, average Americans. Everything from clothes, computers, phones, all prices will explode.
In the long term, we can find other suppliers to moderate the price increase a bit. So, in the long run, we can move production from China to Vietnam and prices will go up a little, but it requires a lot of adjustment and unemployment, because if American factories can't get cheap raw materials from China, they won't be competitive in other markets. So, there will be many unemployed.
CAPITAL: Just before the World Economic Crisis in 2008 and 2009, you criticized some European countries for their austerity measures. Germany was very careful with money. During the COVID-19 pandemic most or even all European countries spent a lot of money to mitigate the negative consequences for the economy. In your opinion, to which crisis did Europe respond better economically?
Stiglitz: Europe managed the crisis better during the COVID-19 pandemic in several ways. Without austerity measures, by issuing Eurobonds. More attention was paid to how to keep workers connected to companies to increase production after the pandemic. I think the response was better than in many other countries in the world and Europe did the things that needed to be done. That was very good.
I was more critical of the moves towards Russian banks after Russia's invasion of Ukraine. My criticism was that they thought the same rules should apply to both normal and war economies, especially when it comes to electricity prices. There was no need for Norway to raise prices.
CAPITAL: Did Europe somehow make a mistake with the Russian sanctions? Can Russia benefit from these sanctions and isolation to improve its economic growth? We can hear from Russian sources that they can produce a lot of it themselves.
Stiglitz: Russia could actually earn more. It took us a year to realize that and to say that we want a cap on Russian oil prices. We didn't know how to manage it, but any economist could have told them that if they imposed sanctions, it would have a huge impact on prices. Economic sanctions are always an instrument that can hardly be effective. They must be universal and unaffected.
For example, the problem with oil is not a big deal and if all the countries in the world refuse to buy that oil, that would be one thing, but if only the West refuses and they can sell it to China and India, then it has a weak effect. It only changes where the oil is transported and who buys it from whom, but the price of oil does not change. It doesn't even change anything in Russia. But we should have known that from the beginning. Second, sanctions would be more effective, for example, with advanced chips. Unless China gets involved.
CAPITAL: There is always something about China. I am from Bosnia and Herzegovina. We are not in the EU. Every time we do business with the Chinese, we get messages from the EU and the US that the Chinese are bad. That it is better for Europe to take care of lithium, not China. Is that the right policy? Is China a worse player than the US or the EU?
Stiglitz: I think that at the moment, as the EU has set it, it is about risk reduction. China says it will take over Taiwan. When? We don't know. Will they really do that? We don't know that either, but if that happens the world would become very divided. If you're dependent on Chinese lithium, you'd be in a very difficult situation. So, the bottom line is that Chinese lithium may be dirtier for the world, but also Chinese lithium carries with it geopolitical risk and regardless of which side you're on, in the event of geopolitical risk, you'll have no choice.
CAPITAL: What is your opinion on the neutrality policy? For example, Serbia, and Bosnia and Herzegovina did not impose sanctions on Russia. In Serbia, they are developing relations with China. They have many Chinese companies there. They try to be in the middle. Is it possible for small countries to set themselves up like that?
Stiglitz: Never in the long run. If you are in Europe, you must be European, and Europe, in my opinion, rightly realized that the world is unfortunately dividing, much faster than we would like. The US is increasingly anti-Chinese, and China has not done anything yet, but China has announced that it will do things that would be very difficult, and China has said that it supports Putin. So, China stated that Russia's invasion of Ukraine is outside international law. So, China's support for Russia puts it on the wrong side. Do you want to be alongside a great country, which is on the wrong side?
CAPITAL: Speaking of war, you said that the war in Gaza could also raise oil prices, but that hasn't happened yet?
Stiglitz: But it could.
CAPITAL: If Iran gets involved?
Stiglitz: If Iran gets involved. There is still a lot of instability when it comes to oil, which is why the transition to renewable energy sources, which I mentioned, is important. The sun is more reliable.
CAPITAL: Another question regarding the region I come from. You commented on privatization in transition countries. No one has yet told us that we have completed the transition. Also, the transition did not go well. Should someone tell those countries that they have completed the transition, they have completed privatization, they are successful or not successful? Also, from this perspective, did the transition have to be like that?
Stiglitz: I criticized what was extreme. Now even the West is reconsidering. For example, Great Britain regrets the privatization of water, railways. They are again considering returning it to state ownership. So, they have gone too far even in the UK. We in the US have now privatized prisons. It didn't work. I wrote a paper explaining why it won't work. Privatizing a paper mill is one thing, but privatizing prisons, water, public goods is another and it was a big mistake.
CAPITAL: I know it's not directly your field of interest, but, for example, Europe always tell us that we should develop small and medium-sized companies, not large companies in the region. Not only Bosnia and Herzegovina, but the entire former Yugoslavia. Before the war, we had companies with 40,000 workers, who built roads, power grids in Africa, Asia and other continents. Now we can't even build a road in our country. They always tell us that we don't have the capacity. It's a bit illogical that we could do all that after the Second World War, but now we don't have the capacity. Is this normal?
Stiglitz: They didn't understand that you should have transformed some of those companies instead of destroying them. Small firms are also now being reconsidered. Small companies have certain advantages, but so do large ones. One of the problems is that they did not differentiate between good companies and companies that needed government help. The idea was that every company has state aid and therefore should be shut down, but that is not true.
CAPITAL: Aleksandra Tolj Ružić