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em>Nobel laureate and former World Bank chief economist Joseph Eugene Stiglitz may come from America, a country known for its free market and liberal economic system, but he has championed the need for stronger state intervention to promote equality in the economy, while voicing strong criticism of the free market and privatization. The 71-year old, an esteemed academician and a professor at Columbia University, recently answered questions from The Jakarta Post'€™s Putera Satria Sambijantoro and other journalists during a visit to Nusa Dua, Bali. The following are excerpts from the interview:

Question: Can you share your views on the outlook for the Indonesian economy?

Answer: I'€™m very optimistic about Indonesia because there is a real opportunity now.

It has had 10 years of growth based on natural resources and that has provided a stronger economy, but it has not been a balanced economy. And that'€™s why we talked about the importance of industrialization, domestic entrepreneurship, domestic SMEs [small and medium enterprises], talking about strengthening agriculture and the service sector.

For Indonesia, having the benefits of 10 years of resource-based growth, now is the time to begin a balanced, inclusive-growth agenda. And I think the next president seems to be very fixated, very focused on that kind of agenda.

If the US Federal Reserve starts tightening its monetary policy and hiking interest rates next year, what do you think will happen to Indonesia?

Unfortunately, the Fed focuses in a natural way on the US economy and does not focus enough, or does not always think about, the consequences for other countries.

When the QE [quantitative easing] began, the problem was we hadn'€™t fully fixed our financial system, so the credit channel was blocked in the United States. The mortgage, SME and export markets were not working.

The result of that was the money went around the world to where it had the highest returns. The highest returns were not in the United States '€” they were in economies like Indonesia where it was doing well.

So, the money is there where it is not wanted. The result of that is countries are forced to impose capital controls, to engage in exchange-rate intervention '€” things that are often costly. This is an important thing that I hope the US learns. If we are a large country, our monetary policy creates externalities and imposes costs on others.

It [the Fed tightening] is going to have a more adverse effect on some countries that have big current-account deficits, low reserves. Some countries are going to be more affected than others.

Indonesia seems to be more affected than a lot of other countries because it is more open, compared to other countries. Indonesia has been a very open economy; it has been very open for a very long time.

And you don'€™t have, like China, some US$3 trillion of reserves. If you have like $3 trillion in reserves you don'€™t have to worry too much, but Indonesia is not in that lucky position.

One of the big lessons from the global financial crisis and Asian financial crisis is that financial markets are very fickle. Money rushes in when things are optimistic while money rushes out when people are very pessimistic.

So that'€™s one of the reasons I have been in favor of capital-account management, capital controls. And that'€™s one of the reasons why the IMF [International Monetary Fund] recognizes that, because capital markets are so volatile.

You'€™ve argued that a central bank'€™s monetary policies can contribute to widening inequality in the economy and the inflation-targeting framework may no longer be relevant. How do you explain this?

Some central banks have had a tendency that every time wages go up, they raise interest rates to dampen the economy. That'€™s a recipe to make sure that wages never go up and that'€™s going to create an increase in inequality.

I think that QE, quantitative easing, has unintentionally contributed to inequality. With quantitative easing, one of the main ways that it works is by flooding liquidity, that led to an increase in stock market prices, which benefits only the wealthy. So it was a strategy that has the effect of increasing inequality.

Moreover, by lowering the interest rates to zero, they lowered the cost of capital relative to labor. So they encourage firms to use very capital-intensive technologies.

So firms are replacing unskilled workers like check-out clerks with machines. They actually stimulated some growth, but the growth is not job-intensive; it is actually destroying jobs.

Weakening the labor market actually contributes to inequality. It'€™s not so much that monetary policy can reduce inequality, but the real point is the misconduct of monetary policy can create inequality.

But central banks can play an important role to ensure that financial markets work for everybody, by giving access to credit, making sure that spreads are low and there'€™s no abuse of credit-card practices, as well as abuse of predatory lending.

As a regulatory authority, a central bank can play an important role [in reducing inequality].

You have been a vocal critic of international organizations such as the IMF and the World Bank in the past. Do you think their assistance and policy views are still relevant to emerging economies, including Indonesia?

There has been a very big change since the Asian financial crisis. I think one has to recognize it'€™s been 17 years. For instance, the IMF has been very vocal about the importance of equality, has been very vocal about the benefits of capital controls or capital-account management techniques.

It'€™s been very vocal that Europe needs fiscal stimulus and desirable deficits. Those are a total 180-degree turn from the position the IMF had here in Indonesia in 1997.

The World Bank has had, you might say, a rocky time. Under Wolfensohn [James Wolfensohn, president from 1995 to 2005], the World Bank was very open to NGOs to focus on poverty, inclusive growth, climate change.

But, after Wolfensohn left, the World Bank went through a very bad period under Wolfowitz [Paul Wolfowitz, former US Ambassador to Indonesia who led the World Bank from 2005 to 2007], where it was basically a servant of the United States. I think the World Bank is in the process of recovery. But, there are concerns going on whether they are focusing enough on the issue of inclusive growth.