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Our Bureau

MR JOSEPH STIGLITZ

Mumbai , Dec. 28

Capital market liberalisation does not lead to faster economic growth and stability, said Mr Joseph E. Stiglitz, Nobel laureate. China does not have free capital markets yet attracts largest foreign direct investment, he added.

Mr Stiglitz's remarks assume significance in the context of the Reserve Bank of India looking at full capital account convertibility. Speaking at a lecture at the RBI on Thursday Mr Stiglitz said, "What affects the level of economic activity is terms at which credit is made available, and quantity of credit, not the quantity of money or the interest rate on Treasury bills."

"Monetary policy affects economic activity not only through its effect on demand (for investments) but also on supply (when there is credit rationing, it impacts the supply of credit)," he said.

Mr Stiglitz emphasised the importance of credit worthiness. "Banks are firms that certify credit worthiness, screen and monitor loan applicants. Banks, like other firms, act in a risk-averse manner," he said. As the bank lends more, the likelihood of bankruptcy increases, and so does the marginal bankruptcy cost, he added.

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