The 1998 Lecture:
Managing the International Economy in an Age of
Peter D. Sutherland
Chairman of Goldman Sachs International and
Chairman of the Overseas Development Council
October 4, 1998
Good afternoon. Thank you, Sir Jeremy, for that kind introduction.
I am honored, not merely to have been selected to deliver this year's Per Jacobsson lecture, but by
the presence of so many distinguished guests. I am also delighted that two previous Per
Jacobsson lecturers could be here this afternoon, and I would like to recognize them: Jacques de
Larosiere, the former Managing Director of the IMF and more recently the President of the
European Bank for Reconstruction and Development, and Joseph Yam, the Chief Executive of
the Hong Kong Monetary Authority.
As many of you know, Per Jacobsson was a major figure in international economic and financial
policy circles for more than forty years. He served as Managing Director of the IMF from 1956
until his untimely death in 1963. During his tenure at the IMF, he was admired for his strong
leadership, and he was recognized within and without the Fund for his powerful intellect.
This distinguished and dynamic Swede devoted his professional life to sound money. He believed
that stable monetary and financial conditions were essential to the promotion of trade, prosperity,
social justice, and political freedom. He would have much to teach us today, at this time of
difficulty in the international financial system.
The current emerging market financial crisis has ignited a great debate about the character of the
world economy and the institutions that govern it. Important questions are being raised about
the validity of economic assumptions and the adequacy of institutions we thought we could take
for granted in the aftermath of the Cold War.
I will touch on the financial crisis in my remarks today. But my focus will be both wider than the
international financial system and more long-range than its current difficulties. I want to talk
about a variety of challenges that globalisation poses for the management of the international
economy, of which financial volatility is but one -- although certainly the most pressing. And
several of the other challenges I want to discuss will remain with us long after the current crisis
The Logic of 1945
Let us recognize at the outset that the story of the post-World War II world economy is one of
remarkable achievement. There was an intentional underlying logic to the design of that
economy. What we might call the "logic of 1945" was no less essential to the success of the
world economy than were its formal institutions and rules.
The key element of the logic of 1945 was the conviction that, to be successful, international
liberalisation had to be anchored in social compacts in which national governments provided for
the social welfare needs of their citizens in exchange for public support for an open world
economy. Two other convictions were shared by postwar leaders. One held that a sound
international economy required the widest possible inclusion of nations from the ranks of the
war-damaged and former enemies. The other held that national governments were the only
international actors of any consequence, and that, therefore, economic diplomacy would be
reserved for them and for the international institutions they controlled.
The performance of the post-war economy has affirmed both the validity of the logic of 1945 and
the genius of our institutions. The intensification of economic interdependence has been both a
cause and a consequence of growth. World goods and capital markets are more open than they
have ever been. And with limited exceptions, major liberalizing steps have been supported by
national publics throughout this period.
Recently, however, a qualitatively new world economy has been emerging, and it is this economy
that we refer to when we speak of globalisation.
1. A Global Capital Market
The most obvious way in which today's economy differs from what preceded it is in the volume
and pace of international capital flows. Capital account liberalisation, the development of new
financial instruments, and new digital technologies have created a fully integrated global capital
market of astonishing scope. The average daily value of foreign exchange transactions grew from
$15 billion in 1973 to $1.2 trillion in 1995, and daily foreign exchange transactions now exceed
total global currency reserves. International capital flows exceed trade flows by a 60 to 1 margin.
2. Changing Structure of Production
The second set of developments that justifies the assertion that a qualitatively new economy is
emerging is the changing structure of international production. In increasingly complex ways,
firms are integrating the production and marketing of goods and services across national borders.
International transactions that formerly took place between independent entities are being
internalized within single firms or corporate alliances. New technologies are enabling services to
be delinked from production and traded or performed remotely. And, of course, the relevant
market for a growing number of internationally integrated but geographically dispersed firms is
global, rather than national or regional.
What is driving the internationalization of production? One analyst put it well: "The minimum
size of market needed to support technological development in certain industries is now larger
than the largest national market." But firms are also integrating production globally and forming
international networks and alliances because these changes allow them to bring under
administrative control transactions that previously had to be conducted at arms-length in external
3. The Benefits of Globalisation
The overall economic impact of globalisation has undoubtedly been extremely positive. Increased
trade and capital flows have generated gains in productivity and efficiency that are spurring
growth and creating millions of jobs in advanced industrial countries. For many middle-income
and developing countries, globalisation has opened the door to export-led industrialization.
Foreign capital is building roads, airports, power plants, and factories, and it is giving local
entrepreneurs investment resources unavailable domestically. Even though international investors
have temporarily deserted some of them, emerging-market countries are aware that a successful
return to the global capital market remains essential to their long-term recovery. In many of the
world's low-income countries, globalisation is lifting living standards faster than many thought
possible a few years ago.
4. The Political Structure of the World Economy
I want to say a few words about the political structure of the world economy, which has
also evolved substantially since World War II.
Dozens of new nations have been born since the end of the war, and a number of countries have
become influential economic actors. To be effective, efforts to address key international
problems now require the support of a much larger number of countries than was the case after
Another significant change is the emergence of non-state actors. Some private firms have come
to rival national governments as consequential players in the world economy. Non-governmental
organizations, or NGOs, and research institutions have also gained influence. The stature of firms
and NGOs is likely to grow further in coming years.
Challenges of Globalisation
Let me turn now to the challenges of globalisation. Despite its substantial benefits, globalisation
is testing governance at both the national and the international level. These challenges are linked:
Many of the things that individual countries find difficult about globalisation are already,
will be, or should be matters of international concern.
1. Emerging-Market Countries and Financial Volatility
It makes sense to start with the emerging-market countries. Not only are they having the most
difficult time with globalisation at this moment, but their struggle threatens the economic
prospects of many poorer and richer countries.
The financial crisis of the past year, the Mexican crisis of 1994-95, and the Latin American debt
crisis of the 1980s all suggest that globalisation's preeminent challenge for emerging market
economies is not how to prevent massive outflows of capital, but how to manage inflows.
For all their benefits, large capital inflows can increase vulnerability to external shocks and
shifts in market sentiment. But long before there is any risk of a catastrophic currency run, capital
inflows of the size seen in recent years can generate inflationary pressure, exchange rate volatility,
declining export competitiveness, and inequality.
The turnabout over the past two years in Asia's finances has been especially remarkable: from a
net private inflow of $100 billion in 1996 to a net outflow of $12 billion in 1997. Capital flows
fueled Asia's boom on the way in, and intensified its downturn on the way out, slashing the values
of local currencies and forcing borrowers to repay in local currency equivalents a multiple of what
they had borrowed in dollars.
The social impact of the crisis has been severe. Years of progress on poverty have been erased in
a matter of months. Throughout emerging market economies unemployment is soaring,
businesses are collapsing, wages are dropping, and prices for basic commodities are rising.
The crisis has underscored the vulnerability of weak national systems of financial regulation in a
globalized financial market. Nearly every serious analysis cites poor banking supervision,
inadequate capital standards, government-directed lending, and limited transparency as principal
causes of the crisis. Stock and property market bubbles, an excessive reliance on short-term
capital, inadequate reserves, and unwise foreign investment decisions also made major
contributions to the mess, of course.
Future market sentiment is hard to predict, but emerging-market countries are likely to face the
challenge of restoring growth without the help of large amounts of private foreign capital. And
when capital flows resume, they will be more costly, and the bulk may initially go to a handful of
the largest emerging markets.
Emerging market financial crises also test international economic governance in several ways.
First, the international system lacks effective means of predicting or preventing
the kind of national financial crisis that can ignite or intensify a systemic crisis. Following each
crisis, sensible changes have been made in national policies, international institutions, and business
practices. But the next crisis invariably exposes new and unanticipated vulnerabilities. We are
always "fighting the last war."
Second, the international response to financial crises is inadequate. From this point
forward, a financial crisis in any single major emerging market economy must be an
international concern. The reason, of course, is the so-called "contagion" effect. We can stabilize
individual countries that move quickly to implement tough reforms, but we seem unable to
prevent them from infecting others. We lack an effective quarantine strategy. As
interdependence intensifies and capital becomes even easier to manipulate, the risks of contagion
could grow. It is essential that we improve our understanding of its mechanics.
Finally, the current crisis could have a lasting impact on the attitudes of governments and peoples
toward the world economy. Many in emerging-market countries are understandably alarmed by
the extent to which participation in the global financial system can undermine national policy
autonomy. This sense of lost autonomy, together with the extraordinary social and economic
costs of the crisis, has begun to undermine confidence not only in globalisation, but in the Western
version of free-market capitalism. The pain of adjustment has led several emerging market
governments to reverse course on liberalisation, and similar measures are under consideration
elsewhere. A sustained and widespread turn away from free-market principles would easily be the
most damaging legacy of this crisis.
2. Low-Income Countries and Marginalization
For the people and governments of the world's low-income countries, the main challenge posed by
globalisation is to avoid marginalization. The problem for many of these countries is not what
globalisation has or has not done to them, but that it threatens to pass them by altogether. Many
of the world's poorest countries lack the human capital, the institutions, the physical
infrastructure, and the policies necessary to seize the trade and investment opportunities of
A variety of data suggest that marginalization is already a reality. The per capita GDP of
developing countries as a whole has nearly tripled since 1960, but real per capita income in
Sub-Saharan Africa was only $28 higher in 1995 than it was in 1960. The income ratio between
the world's richest 20% and its poorest 20% was 30 to 1 in 1960; by 1990 the gap had widened to
more than 60 to 1. The UNDP reported last month that the world's richest 20% account for 86%
of total private consumption; the poorest 20% consume only 1.3%. Approximately 1.3 billion of
the world's people still earn less than $1 day.
Other data underscore the limited participation of the world's least-developed countries in the
international economy. Exports account for about 24% of GDP in the developing world as a
whole, but only 9% in the least-developed countries. One third of developing countries have
experienced a decline in their ratios of foreign direct investment to GDP over the past two
Global trade negotiations could offer a partial solution to marginalization, but low-income
countries are not well-equipped to drive a hard bargain, and, indeed, progress on opening markets
to their important agricultural and textile exports has been slow.
Ensuring that low-income countries don't miss out on the benefits of globalisation is a crucial test
for international economic governance and for developed countries. Poverty remains the world's
most urgent moral challenge. Yet particularly following the end of the Cold War, there has been a
disturbing tendency to look on the widening gap between rich and poor with indifference. This is
short-sighted. Eliminating poverty is not only the right thing to do; it is essential to fulfilling the
world's growth potential. Even if a moral imperative to address human suffering did not exist, it
would be in the self-interest of developed countries to confront global poverty aggressively.
3. Advanced Industrial Countries and Labor Insecurity
Globalisation poses less severe challenges to advanced industrial countries. For them, the main
challenge of globalisation is the pressure it imposes on lower-skilled workers. By making it easier
-- through trade, investment, and outsourcing -- for firms to substitute lower-skilled labor from
one country with lower-skilled labor from another, globalisation forces workers to bear a higher
share of the costs of improved benefits and reduces their bargaining power relative to employers.
The result is greater job insecurity and downward pressure on wages and benefits.
Capital mobility can also make it harder for advanced industrial governments to promote domestic
social welfare. It can undermine the effectiveness of labor legislation and standards. By
weakening the tax base, capital mobility can also make it harder for governments to pay for social
insurance programs. As economic integration has proceeded, tax burdens have shifted from
capital to labor, the less mobile factor of production.
The upshot is that globalisation simultaneously increases the demand for social insurance
in advanced industrial countries while decreasing the capacity to provide it. While it has been a
net plus for workers in advanced industrial societies, globalisation has increased the vulnerability
of some lower-skilled workers. Anxiety about the fate of the lower-skilled fueled some of the
protests against EMU-inspired budget cuts and the U.S. Congress's rejection of fast-track trade
authority. If this anxiety is not addressed, it could undermine the domestic social compact that
has sustained public support for policies of free trade and openness. The fraying of the social
compact in the world's principal economies would put the integrity of the international liberal
order at risk.
4. Shared Challenges
In a variety of ways, the political authority of governments no longer corresponds to the
geography of the markets and production networks in which firms and workers now operate. The
policy capacity of governments at all levels of development is being challenged by this growing
disjunction between national political and economic space. I want to highlight several of the most
difficult of these challenges.
First, the globalisation of production is making it more difficult for governments to pursue
national trade, industrial, and competition policies. Governments can no longer easily distinguish
between domestic and foreign firms for the purposes of R&D spending, investment promotion,
export subsidies, or import protection. Globalisation also poses difficulties for competition
policy, as new international production arrangements sometimes force governments to choose
between promoting national industries and limiting excessive market power.
Second, the growth of intra-firm transactions is complicating the work of national
authorities responsible for taxation and economic policy.
Third, governments are having difficulty managing electronic transactions facilitated by
new digital technologies. An increasing number of global markets have only the most tenuous
relationship to geographical territory.
Fourth, globalisation is making it harder to achieve social welfare goals. The mobility of
corporate productive assets -- capital, technology, managerial skills -- enables firms to minimize
their tax exposure and forces governments to compete for investment with tax breaks and
subsidies. This puts pressure on the revenues governments need to pay for social welfare
Finally, liberalisation and changes in the structure of production are generating new trade
disputes over policies and practices that have traditionally been regarded as domestic. The fact
that some of these policies have deep roots in national history, values, and interests makes the
new disputes especially hard to resolve.
Perhaps the most vexing of these new trade conflicts have to do with the relationship between
trade, on the one hand, and labor standards, environmental standards, and other social and
economic factors, on the other. Influential NGOs and trade unions argue that competition for
trade and investment creates pressure to suppress or downgrade environmental, labor, and other
standards. This so-called "race to the bottom," they argue, degrades the quality of life in
countries where standards are lower and unfairly disadvantages workers in countries where
standards are higher. They propose bringing these new issues into the international trading
Disputes are already proliferating at the other end of the standards continuum. Countries
have initiated several WTO challenges to stringent foreign environmental and health-related
standards on the grounds that they are inconsistent with multilateral trade rules. Over time, the
list of governments and NGOs with grievances against the WTO is bound to grow.
5. Global Leadership Deficit
As this discussion of the WTO suggests, globalisation is imposing new pressures on key
international institutions. It is also exposing weaknesses in the current system of global
International institutions are being asked to resolve disputes and take on missions for which they
lack either the mandate, the expertise, or the resources. When they fail to handle these new
disputes and missions effectively, governments and NGOs criticize their performance and question
International institutions and agreements are under pressure, and expectations for their
performance unreasonably high, in part because international political leadership has been missing
in action. Many of the things institutions are being asked to do can only be done either by
governments themselves or by institutions with stronger and clearer guidance from governments.
The absence of political leadership partly explains the lackluster way in which the world has
responded to the current financial crisis. But more fundamentally, inadequate leadership threatens
the viability of key institutions and the integrity of the liberal international economy.
Considerable hope for economic leadership has been pinned over the years on the G-7 summit
process, and G-7 summits have achieved some success. But the G-7 process started losing
momentum and a sense of purpose more than a decade ago. Globalisation issues have been on the
agendas of several G-7 summits, but the full range of countries and interests that have stakes in
those issues have not been represented at the table. The absence of leaders from key regional
powers and other countries has limited the G-7's effectiveness and, most importantly, its
The Logic of 2000
The broad conclusion I would draw from this survey of the challenges of globalization is that
nations acting alone can no longer hold up their end of the social compact necessary to sustain an
open world economy. That was the core of the logic of 1945. The social compact remains no
less essential today, but sustaining it requires a different logic. The logic of 2000 calls for a new
division of labor and new forms of interaction among private actors, national governments, and
the international system.
1. The Role of the International System
First, the international system. Problems that formerly were the responsibility of national
governments must now be addressed at the international level. This will require an evolution in
our understanding of the meaning of sovereignty in an interdependent world.
International institutions and agreements will need to assume two principal missions, both of
which will help bolster economic and social management. First, they will need to play a larger
role in managing competition and promoting cooperation on the shared globalisation challenges I
identified earlier. That will require more active involvement in conflicts over issues, policies, and
values that until recently were regarded as exclusively national concerns.
The second critical mission for the international system in the new division of labor will be to help
governments better manage the insecurity and volatility associated with globalisation. We have
succeeded in our postwar objective of generating economic growth in a liberalizing world
economy. While sustaining that growth, we must now enhance economic security and stability in
an integrated global economy.
The international system can help do that, in part, by giving governments space -- by tolerating
national variations in capitalism and limited measures to cushion the domestic impact of the world
economy. No two countries will come to the same conclusion concerning the best way to
organize an economy and link up with the international system. Value and interest trade-offs are
bound to differ from country to country. An open global economy must accommodate these
The recent volatility has led some to propose a fundamental overhaul of the international financial
system. Reforms of existing institutions and changes in their assignments clearly need to be on
the table, particularly in the area of finance. But I am not persuaded that we need new
institutions. The institutions we have today are not unsound; much of what they are criticized for
can ultimately be laid at the feet of governments. With some renovation, and stronger leadership
from governments, our institutions should be able to play the role that the logic of 2000 requires
But, above all, we must expand the circle of international decision-makers. It is simply no longer
possible to make progress on global economic issues without the participation of key, or
representative, emerging market and low-income countries.
2. The Role of National Governments
What about the role of governments in this new division of labor? Governments and the people
who elect them will need to be more prepared to give international institutions and agreements
authority to address new international challenges. Sovereignty anxieties, particularly in the United
States, will make this a difficult process. We must advocate a sensible middle-ground position on
sovereignty: World government is not on the table. It is neither achievable nor desirable.
Absolute sovereignty is no longer a viable option either; in fact, going it alone ultimately
diminishes autonomy. But voluntarily participating in more robust international
institutions and agreements strengthens, not weakens, national capacity to influence
events, which is the essence of sovereignty.
There is no better proof of the viability of this middle-ground position on sovereignty than the
European Union. The development of the EU over the past few decades has been a noble and
remarkable achievement in the sharing of sovereignty. Its nobility derives from the willingness of
nations to share power through common institutions. The EU is, of course, a supra-national
rather than an inter-governmental undertaking, but it is deeply worrying that even
inter-governmental multilateralism is now being attacked by some serious politicians in the
Policy Reform Priorities
Having sketched out the logic of 2000, I would now like to make some suggestions for reform.
My proposals fall in two broad areas: policy and global governance. I will start with the policy
1. Avoiding Marginalization
Preventing the marginalization of the world's least-developed countries will require initiatives in
three inter-linked areas: debt relief, development assistance, and trade and investment.
a. Debt Relief
In the short-run, the most helpful thing the international community can do for low-income
countries is to reduce the debt of those committed to economic and political reform. Reduced
debt payments will free up precious funds for domestic investment and purchases of foreign
The pace and volume of debt reduction have been disappointing to date. Under the World Bank's
and IMF's initiative for highly-indebted poor countries, as many as six years can pass before relief
is provided. Without a change in policy, only four countries will have received any debt reduction
by 2000. We will remain on a debt treadmill, with donor countries continuing to give just enough
aid to reforming debtor countries to enable them to repay old debts.
The resources needed to offer substantial relief are not prohibitive. We should embrace the
British government's proposal that debt reduction begin for all qualifying highly-indebted
countries by the year 2000.
b. Development Assistance
Low-income countries ultimately need private foreign capital to help build the institutional and
physical infrastructure necessary to participate in international trade and investment. But they
can't attract private capital without better infrastructure, policies, and human capital.
Development assistance remains essential to helping low-income countries overcome this
frustrating "Catch-22." It can help low-income countries build the capacity to expand trade and
attract investment. It can also reduce poverty and help them contribute more effectively to the
resolution of global problems, such as containing the spread of infectious diseases and protecting
Unfortunately, bilateral and multilateral aid expenditures have been declining for several years.
The decline in aid spending is especially regrettable because there is broad agreement today
among aid specialists on the key development lessons of the past few decades. These lessons can
provide the foundation for a broadly-agreed new international framework for development
cooperation. A consensus on how to manage aid could also generate support for increased aid
expenditures. What level of aid would be appropriate? The amount necessary to help cut global
poverty in half by 2015, the target proposed by the OECD. Surely donor nations can achieve that
Resource limitations require us to provide aid on a more selective basis. We will need to make
judgments about the commitment and the capacity of governments to implement sound
macroeconomic policies, saving and investment policies that promote growth, and measures that
open employment and social services to the poor. Policies on governance, human rights, and
environmental protection should also factor into our aid decisions. Countries that do not meet
these performance standards should receive only humanitarian assistance.
c. Trade and Investment Policy
Over the long-run, though, aid and debt relief will not suffice. We must also take steps to help
low-income countries expand and diversify their trade and attract investment.
Many low-income countries have unilaterally moved to open their economies in recent years. The
international system must reward these difficult reforms by expanding access to world trade
markets. WTO Director-General Renato Ruggiero has proposed -- and others have seconded --
the elimination of tariffs on all imports from the world's 50 or so least-developed countries. This
would not be a costly step for most advanced industrial countries, or even for many
middle-income developing countries. This proposal should be on the agenda of the next WTO
ministerial, which is scheduled for late next year.
The exports of low-income countries also face a number of non-tariff barriers. These barriers are
common in two sectors that are particularly important to developing country exporters: textiles
and agriculture. Even after the Multi-Fibre Agreement is phased out early next decade, textiles
will still face higher-than-average import tariffs. Along with the proliferation of anti-dumping and
countervailing duty measures in advanced industrial countries, these appear to be threshold trade
issues for low-income countries.
Finally, we need to do more to help low-income countries negotiate and implement trade
agreements. Many of these countries lack the analytical, legal, and negotiating skills necessary to
participate effectively in multilateral trade talks. Some are also struggling to comply with existing
2. Preventing and Responding to Financial Crises
Now let me turn to the struggle of emerging-market countries with financial volatility. Improving
our capacity to prevent and respond to financial crises has clearly become the most urgent priority
for international economic reform.
a. Preventing Crises
With respect to preventing crises, we need to do several things.
On surveillance, the decision by the IMF Interim Committee earlier this year to require
more intensive Fund monitoring of capital accounts -- in particular, the risks of capital flow
reversals -- is to be welcomed. So also the Interim Committee's suggestion that the Fund adopt a
tiered response to surveillance concerns, requiring progressively stronger warnings to
On transparency, as many have suggested, there is no doubt that more timely, accurate,
and comprehensive data on public and private finances are crucial. With G-7 support, the IMF
has already taken important steps to promote greater transparency. My understanding is that
more than 40 countries are expected to be in compliance with the Fund's 1996 Special Data
Dissemination Standard by the end of this year. But more can be done in this regard:
Finally, also on transparency, we should explore a proposal by Charles Dallara, the head of the
Institute for International Finance, for increased transparency by creditors. Dallara
suggests that aggregated global investment data could help sharpen the financial picture
provided by data from borrowers, without compromising proprietary information.
- We should publicize the list of countries in compliance with IMF data standards.
- We should require more frequent and detailed reporting on foreign exchange reserves,
including the size and maturity of all liabilities.
- We should insist on better data on the foreign currency liabilities of private financial
institutions and major firms.
- And we should make compliance with transparency requirements a condition of IMF
Turning to the supervision and regulation of private finance, I note that there is broad
support for the development of standards of best practices for other financial sectors comparable
to those the BIS has established for international banking. Domestic banking is an especially
needy candidate for tough new standards, but we need new or strengthened standards for
securities, accounting, auditing, asset valuation, corporate governance, and deposit insurance.
We should also consider establishing for domestic systems of financial regulation and supervision
a surveillance system parallel to the one we have for economic policy.
We all agree that financial sector reform must precede full capital account liberalisation. But the
necessary reforms are complex and costly, and many governments will need financial and technical
assistance to implement them. We also need to investigate ways to help countries build firewalls
between governments and financial institutions, to reduce harmful patronage and directed lending.
b. Responding to Crises
With respect to responding to crises, I have a couple of suggestions.
First, in those crisis situations in which it is clear that the World Bank will be called upon to
provide financing or technical assistance, the IMF should develop and negotiate rescue programs
jointly with the Bank. The two institutions play complementary roles in crises. Restoring stable
growth in crisis countries requires a combination of the short-term liquidity that the Fund is
best-equipped to provide and the long-term structural reforms that are the Bank's particular
The current crisis has produced some overlap between their operations, as the Bank has been
asked to provide quick-disbursing loans. This overlap has led some to call for the merger of the
two institutions. I do not believe a merger is the right course of action at this stage, as the two
institutions have distinct missions and expertise. A wiser course would be simultaneously to
clarify their division of labor and require them to work more closely together. I recognize that the
staffs and managements of the two institutions do consult frequently, but I think we need to go
further. The success of each institution's contribution is directly affected by what the other does.
They should jointly develop emergency loan packages and conditions.
The role of private creditors in crises also needs to be reassessed, although not entirely for the
reasons usually mentioned. One concern is moral hazard. Some emerging-market creditors have
been made whole during the recent bailouts. While this may be an unavoidable result of
international rescue efforts, it does pose some moral hazard risks, and those deserve attention.
The more important reason to address the private sector's role in financial crises is that there is a
widespread public perception in creditor and debtor countries that large investors are not bearing
the full cost of their investment decisions. Whether or not this perception is entirely true, it has
political implications that we ignore at our peril. It has clearly contributed, for example, to U.S.
congressional opposition to the IMF quota increase.
Several analysts say creditors should take a so-called "haircut" -- a mandatory loss -- whenever
there is an international bailout. In principle, I support conditioning official assistance on some
amount of rescheduling by private creditors. Korea's agreement with foreign bank creditors
earlier this year was a model for public-private cooperation to forestall default. A number of
interesting proposals for work-out mechanisms and other methods for restructuring debt have
been tabled recently. These proposals deserve careful consideration, but this is an extraordinarily
complex problem, and progress could be slow.
c. Capital Controls
Finally, I would like to comment on the question of capital controls as a means both of preventing
and responding to financial crises.
As a general rule, I believe capital should be permitted to flow freely, in search of its best return.
There is little doubt that the free flow of capital -- of all kinds -- has been a net plus for
developing economies. Long-term portfolio investment has made a valuable contribution to
economic growth. Direct investment has been an equally indispensable conveyor of technology
and builder of human capital. Nothing that has happened over the past year should cause us to
question the value of long-term investment to developing countries, and I can think of no
circumstances under which long-term capital inflows or outflows should be controlled.
However, very large inflows of short-term capital may sometimes be a different story, because
they can clearly increase the risk of sudden and damaging outflows. Under normal circumstances,
I see no persuasive case for controls on flows of short-term capital. If a country's financial system
is sound, it should permit capital of all kinds to flow freely. But carefully structured controls on
capital flows may be warranted when a country needs a pause during which to reform a weak
financial sector. Under what conditions should controls be applied? I would propose four
First, controls should seek to deter only short-term, overly speculative
inflows at the point of entry into an economy. Long-term portfolio and direct investment
should not be restricted. Nor should controls be used to prevent capital from leaving an
Chile's successful use of a tax on short-term inflows deserves consideration by other countries.
But Malaysia's new restrictions on capital outflows are certain to deter future private investment,
increasing the long-term cost of its recovery.
Second, controls should be temporary.
Third, controls should be simple. Their design should seek to limit market distortions and
opportunities for corruption.
Fourth, and most important, capital controls must be used in support of structural reform,
not as a means of avoiding it. While they can create better conditions for reform, controls can
also limit incentives to undertake reform by reducing the costs of doing nothing. To improve the
chances of successful reform, controls should be applied in conjunction with an IMF program.
Some will object to any form of capital control, arguing that governments should not intervene in
the workings of the free market. But the multi-billion dollar international rescue packages of the
past year already constitute significant free-market interventions. If the breathing space they
provide is used for effective reform, controls on short-term capital inflows can decrease the
likelihood of costly bailouts. And market actors will also welcome the more stable investment
climate that financial sector reform can help create in developing countries.
3. Responding to Shared Challenges
Earlier I identified challenges that globalisation poses to nations at all levels of development. I
have several suggestions for how these challenges should be addressed.
a. "New" Trade Issues
Efforts to link trade more closely with other issues, such as labor and environmental standards,
pose risks for the WTO and for the trading system more broadly. The WTO is certainly one
institution in which these linkages could be discussed and researched. But the WTO should not
be the lead institution through which issues like these are addressed or resolved. The WTO's
mission must remain the reduction of barriers to commerce. To burden the WTO with these
controversial new trade issues would decrease its effectiveness in carrying out its core mission
without promoting progress on the issues themselves.
Proposals to address these issues in new agreements that would be enforceable through trade
sanctions pose perhaps the greatest threat to the trade system. Unencumbered by political
agendas, trade can be a progressive force. The growth that trade stimulates generates resources
with which countries can improve labor standards and strengthen environmental protection, if they
so choose. Trying to turn trade institutions and agreements into tools of social and political
reform will lead to protectionist measures and nasty disputes, ultimately reducing trade.
Two things must be done to prevent the WTO from being burdened with inappropriate missions
and to reduce the threat posed by new trade issues.
First, rather than seek higher labor, environmental, and other standards through trade, we should
seek to strengthen the international institutions and agreements directly responsible for those
standards. Stronger institutions and agreements can resolve disputes and promote the gradual
harmonization of standards.
Second, the WTO's staff and budget absolutely must be increased. I don't think any of us
anticipated how active the WTO's dispute-settlement body would be, nor did we foresee the
extraordinary demand for trade research and technical assistance. The rhetoric of support for the
WTO by some of its largest member economies has not been matched by resource contributions.
The WTO does an impressive amount with a small budget; it would not need much to sponsor a
more active program of research, consultation, and technical assistance.
b. Competition for Capital
The big postwar multilateral trade rounds established a system of rules for the regulation of trade.
We now need a similar regime to help referee certain aspects of the international competition for
The negotiations on a Multilateral Agreement on Investment were meant to address some of these
issues. As you know, the MAI talks stalled earlier this year. But even if they are restarted, they
have what I consider a fatal flaw: they are restricted to OECD members. There is already great
suspicion about the MAI in the developing world. Any agreement negotiated exclusively by
OECD nations seems bound to receive a hostile reception.
The MAI negotiations -- or any successor talks on investment -- should be brought into the WTO.
Not only would WTO talks be more inclusive, but investment negotiations in the WTO could also
be wrapped into a broader trade round, where advantageous cross-sectoral tradeoffs could be
made. It also might be possible in the WTO context to take up subsidies and other investment
issues that have been dropped from the MAI.
The new OECD convention requiring countries to outlaw bribery by their nationals also needs to
implemented. The signatories must intensify efforts to pass the necessary ratifying legislation.
Once the convention is secure, an aggressive campaign to sign on additional countries should
commence. The accession of just a few prominent emerging-market countries could build
momentum for widespread ratification, as governments seek to avoid being identified as soft on
c. Competition Policy
Finally, a multilateral agreement on competition policy is also urgently needed. Such an
agreement can only realistically seek to harmonize the essential elements of national laws, and to
stimulate cooperation among national and regional authorities. To try to go further at this time
would be futile.
A WTO work program on competition was initiated this year. A wide divergence of views is
already apparent. Many developing countries, joined by Japan, have said they will not address
concerns raised by the United States and the EU without new disciplines on anti-dumping.
Perhaps we have the makings of a grand bargain?
Strengthening Global Governance
The second major part of my reform agenda has to do with governance. The international system
will need more effective governance if it is to meet the challenges of globalisation and help
governments improve the lives and protect the economic security of their citizens.
There are two priorities for more effective global governance: stronger international institutions
and a leadership strategy that corresponds to the global scope of today's challenges.
1. More Effective International Institutions
International institutions will be asked to take on a variety of new assignments in the coming
years. To carry out these new responsibilities effectively, the institutions must be strengthened.
First, they must become more accessible to stakeholders in civil society. Second, their research
and national capacity-building efforts need to be expanded, and that will require firmer financial
International economic institutions have long been criticized for not being sufficiently accessible
to the civil society constituencies that have a stake in what they do. While all of the major
institutions have taken important steps to enhance public access and accountability over the past
few years -- steps for which they have not received enough credit -- some of their resistance to
greater openness and public input has been unreasonable and, ultimately, harmful to their
credibility and effectiveness. In this more demanding and volatile political environment,
institutions cannot effectively shoulder new burdens and retain legitimacy without becoming more
responsive to civil society. However, it should also be recognized that, at present, the resources
available to many of the institutions -- the WTO, for example -- are inadequate to properly further
the necessary dialogue.
That brings me to the second reform priority for international institutions, which is to make sure
they have the resources necessary to handle the new assignments we are giving them. I have
already mentioned the WTO, whose budget clearly needs to be increased. Big new loans to
countries hit by the financial crisis are straining the World Bank's capital and increasing the
riskiness of its portfolio. The IMF has nearly depleted its usable resources. If we want these and
other institutions to do more to promote economic stability and security, we will need to take a
hard look at the adequacy of their current funding.
2. A Globalisation Summit
The ambitious reform agenda I have set out will require concerted, high-level political leadership.
Existing mechanisms for the exercise of international leadership are inadequate. The G-7 is too
narrow in its membership. The annual meetings of the World Bank and the IMF are preoccupied
with narrow finance issues. WTO ministerials are devoted solely to trade. The yearly gathering
of heads of state for the opening of the UN General Assembly is too ritualized.
The mechanism I propose for marshaling global leadership is a carefully designed summit meeting
of heads of state -- a Globalisation Summit.
The Globalisation Summit would be dedicated to addressing the key challenges of globalisation.
The meeting, which should take place before the end of 1999, would not be a negotiating session
and would not supersede or replace any existing forum. It would involve a structured but
The goals of the summit would be to identify areas of common concern and to try to reach
consensus on how to respond to them. The discussion would include an assessment of the
adequacy of existing institutions and agreements and their relationships with national governments
and private actors. Financial volatility would clearly be high up on the summit agenda, but it
would not be the only item on that agenda.
At the conclusion of the Globalisation Summit, the participating heads of state would decide
whether to reconvene periodically. We believe they will find such a meeting sufficiently useful
that they will choose to meet again. But the widest possible participation in the initial meeting
requires, we think, that no government be concerned that it must make a long-term commitment
to a process of unknown value.
To be successful, participation in a Globalisation Summit must be fully representative of the world
economy. Leaders representing all of the world's major regions and each of its levels of
development must participate. While it might be desirable, in principle, for the leaders of all the
world's governments to take part in a Globalisation Summit, a gathering of that size would be a
logistical nightmare. Two dozen heads of state would perhaps be the ideal size for such a
meeting: large enough to allow broad international representation, but not too large to prevent
genuine give-and-take. In addition to heads of state, it would probably also be useful to include
the heads of the World Bank, the IMF, the WTO, and the United Nations.
Which countries would participate in the Globalisation Summit? Several selection schemes could
be explored. One might be to follow the memberships of the Development and Interim
Committees of the World Bank and IMF. These include most of the major economic powers,
plus constituency representation for smaller economies. Another option would be to include three
groups of about eight nations each: all or most of the major industrialized countries; leaders of
emerging market nations; and leaders of least-developed countries. Priority should also given to
ensuring roughly equal participation from the five major geographic regions: Africa, Asia-Pacific,
Latin America and the Caribbean, North America, and Europe.
The precise agenda of the summit should be determined by the participating governments, but a
committee of independent experts should be charged with preparing background material and a
proposed agenda. The material prepared by the experts group would be used to structure the
discussion. It might also include recommendations for action. This structured approach to
discussion has been used successfully before, most notably in the APEC context.
Let me conclude by returning to a persistent theme in my remarks.
While my focus today has been the international economic system, I have spent a lot of time
talking about issues of political sustainability. Precisely because it has been so successful, the
postwar economic system now threatens to undermine its own political foundation. Those of us
who work for firms that benefit from the global economy or for international institutions that help
manage it have a special obligation to help shore up that political foundation. We can do that by
supporting the efforts of governments and international institutions to respond more effectively to
the challenges of globalisation.
But in the final analysis, sustaining political support for an open world economy is a challenge for
political leadership. It is especially a challenge for the leaders of the most powerful nations,
because they must be willing to lead a more inclusive decision-making process than they are
accustomed to. Along with many others, I have tried to suggest a number of steps these leaders
might take if they choose to act jointly. But only they can supply the vision and courage
necessary to move forward.