Also think before opening markets to financial products, says the Nobel laureate

India, with its abundance of entrepreneurs, must tread the path of foreign direct investment with caution, in the light of the “overwhelming” evidence other countries have to offer on the issue, economist and Nobel laureate Joseph Stiglitz said here on Monday.

He was giving a lecture on ‘Redefining Capitalism,’ organised here by the Asian Development Research Institute.

Professor Stiglitz said he was not against FDI as it was “an important instrument of economic growth.” However, its purpose was to reap “capital, technology, access to markets and training.”

Without naming the supermarket giant Walmart, Prof. Stiglitz said, “One retailer, which has been widely discussed, has the reputation for bad labour relations, discrimination on the basis of gender, not providing adequate health benefits, and more recently bribery, particularly in the context of Mexico.”

In the case of India, it was “unclear” what it was hoping to get from this foreign investor. India’s situation was “particularly interesting and different from other countries.” “Right now India is exporting capital. It needs to increase its savings rate more. India has a very large supply of entrepreneurs. It is exporting entrepreneurs to America and countries all over the world. Within the country too there is strong entrepreneurship.”

Moreover, retail technology was widely available. “And one of the successes of India’s entrepreneurs is they know how to apply our technology. Companies in Bangalore know how to improvise systems, do operations research,” Prof. Stiglitz pointed out.

“The evidence that despite this company [Walmart], there have been benefits to small producers is lacking and this is telling,” he said.

In the area of financial products too, the Nobel laureate had a word of caution for India.

“India has to ask before opening its markets to financial products, what they are going to do for promoting growth. The evidence is so overwhelming that these instruments will promote instability that a lot of caution is needed.”

Prof. Stiglitz called for a greater role for the state in promoting and regulating capitalism, and restructuring the economy.

In the context of corporate governance, “failure of the U.S. government to play that role led to the economic crisis … Between 1929-1933, farm incomes fell drastically. The economy could not restructure itself until the U.S. government restructured it by moving people from agriculture to manufacturing. Markets don’t develop on their own, they need governments to create them,” he said.

According to him, the problem before the U.S. today was moving towards a service sector economy. A balance between capitalism, State and civil society was vital for success and growth based not on the obsession with GDP or the “metrics of success”, but taking into account issues of sustainability, distribution and general well-being.

“Governments have to undertake policies which are people-friendly. Growth cannot be based on crony capitalism.”

The role of the state in providing social protection and social justice was all-important, he said.

Prof. Stiglitz warned against blind pursuit of the American model of capitalism. “Societies with great inequalities are not likely to function well. Many economies are trying to imitate the American model. If they imitate too well, they will end up like America, with large inequalities.”

He praised Bihar for “demonstrating that changes are possible.” While Bihar’s “success” provided hope to other States, “enormous challenges in sector after sector” remained.

The renowned economist also backed the State’s call for declaring the ancient sites of Bodh Gaya and Nalanda University World Heritage sites. Chief Minister Nitish Kumar said that his government was trying to walk the path of “growth with justice.”