In an Uncertain World (55 page)

CHAPTER FOURTEEN

A Declaration of Interdependence

WHEN I BEGAN WORKING on Wall Street, what happened to the global economy outside the United States had little impact on me and my colleagues. At that time, Goldman Sachs, one of the top investment banking firms in New York, did not have a single overseas office. We had some limited business links with the industrialized countries in Europe and with Japan, but we could not even have imagined doing significant business in the developing world.

That seems hard to believe today. One of the most fundamentally important changes I have seen over the course of my career is the vast increase in the links between our country and the rest of the world, including the developing countries. Decades ago, when Treasury Secretaries traveled abroad, they visited London, Paris, Bonn, and Tokyo. In my tenure as Treasury Secretary, among the countries I traveled to were Argentina, Brazil, China, Côte d'Ivoire, India, Indonesia, Mozambique, the Philippines, Ukraine, and Vietnam. As we saw during the Asian crisis, our economic health is more and more affected by what happens in the rest of the globe. Developing economies, which now buy 40 percent of American exports, have become an important part of our world.

In my career, I have been concerned mostly with the economic and financial links that tie our interests to those of other nations. These are still, for the most part, insufficiently appreciated by the American public. Our people badly need a better understanding of the complex phenomena of trade liberalization, the spread of market-based economics, and financial market openness—which are often lumped together under the rubric of globalization. And economic ties are only one aspect of a broader interdependence that is even less well recognized by most people and equally needs better public understanding. All of this should lead, I think, to a deeper realization of how important the economic and social conditions of people around the world are to our own national well-being.

On a business trip to Asia during the summer of 2002, I had a two-hour conversation with Lee Kuan Yew, the Senior Minister of Singapore. I'd gotten to know the Senior Minister somewhat during the Asian financial crisis, when he had demonstrated the enormous depth of his geopolitical understanding and grasp of regional issues. He said that there was as yet no paradigm, of the kind that existed during the Cold War, for understanding militant Islamic fanaticism as a factor in world affairs, and that much of the thinking about the issue was simplistic. I agreed with him that most people didn't know how to think about terrorism and other geopolitical risks. From my point of view, the question of fanatical religious violence in general and anti-Western terrorism specifically remains bound up with issues of poverty, inequality, and the fact that, even with the dramatic increases in living standards in many parts of the world in recent decades, there remain huge areas of terrible poverty and isolation from the benefits of the modern economy.

To be sure, the relationship between poverty and terrorism is hotly debated and complex. The terrorists behind September 11 came primarily from middle-class families, and experts point to a wide array of factors that have led to the deep anger underlying terrorism. Still, poverty breeds resentment, alienation, and hopelessness, which can foster an environment hospitable to terrorists, such as Afghanistan in the period leading up to the World Trade Center attacks.

In fact, terrorism is only one of the risks we face that have a connection to global poverty. Early in his administration, President Clinton passed around an article by Robert Kaplan entitled “The Coming Anarchy,” which argued that the terrible problems most visible in West Africa—environmental destruction, disease, poverty, and political conflict—were likely to spill across borders, undermining the security of wealthy nations. That led me to read Kaplan's book
The Ends of the Earth: A Journey at the Dawn of the 21st Century,
which elaborated the case that the “gated-community approach” to life that I had seen in some developing countries, and even to some extent in New York, was less and less effective in insulating industrial countries from problems in other parts of the world.

Kaplan's book crystallized a set of thoughts for me that had been developing for a long time about the threat global poverty poses not just to developing countries, but to developed ones. Today, public health hazards have spread rapidly from countries that simply cannot afford even modest medical care for most of their people. Cross-border environmental dangers—such as the loss of biodiversity and contamination of the atmosphere—reach us from countries where most people's daily struggle for existence precludes any real focus on the environment. In some industrial countries, an influx of immigrants trying to escape from poverty is creating social and political problems. And when states collapse, or dissolve into conflict, the international community tends to become responsible for the massive humanitarian problems that result. There are strong reasons for trying to deal with poverty in poorer countries for the sake of those who live there. But success in bettering conditions in the developing world is also critical to our national self-interest.

Many of those who care deeply about global poverty have expressed great skepticism about globalization and open markets. I believe that what is sometimes framed as a divide between those who care about poverty and supporters of globalization is a false debate. President Clinton's comment that a strong economy is the best social program also applies to developing countries, where rapid economic growth is critical to raising living standards and lifting people out of poverty. Globalization and market-based economics are central to growth and have contributed greatly to huge increases in living standards for many nations and vast numbers of people.

But as President Clinton also used to say, growth and markets on their own are not enough. Government also needs to put in place policies to promote the broad-based sharing of growth, and to address many important needs that markets by themselves will not deal with adequately. And those measures will, in turn, increase growth by improving the productivity of the workforce. The same is true in the global arena, where poverty and inequality and their attendant social ills remain huge problems—and powerful impediments to productivity and growth. In poor countries, some of the most basic prerequisites for a functioning market economy, such as the rule of law and effective and noncorrupt governments, as well as adequate education, health care, and the like, are too often lacking.

Every time I've visited a developing country, I've come away with a renewed appreciation of how difficult the problems in such countries can be. Mexico, for instance, had a succession of Presidents and finance ministers, starting in the mid-1980s, who implemented broad-based reform. Largely because of intelligent policy choices, many economic fundamentals in Mexico are sound and the country's prospects are good. Nevertheless, growth rates have been modest. Too much of the population still has little access to reasonable health care and adequate public education, and public resources to address these problems are insufficient. Beyond that, Mexico faces the challenges of establishing the clear rule of law needed for an effective market-based system, including fighting corruption more effectively. It also needs to encourage a higher savings rate. All of these changes are difficult, not only substantively, but politically.

It was in the context of thinking about inner cities and poverty here in the United States that I first came to focus on the idea of a “parallel agenda.” What this means is that market-based economics and integration with the wider economy, the fundamental policies for growth, should be allied with a “parallel” set of policies to help fulfill the needs that markets will not adequately meet, such as a reasonable social safety net and retraining programs for those workers dislocated by change. Later, as a result of the Mexican and Asian crises, I focused on these issues as they relate to emerging markets. Effective implementation of a parallel agenda in developing nations would promote a broader sharing of the benefits of globalization, which in turn would increase productivity and so advance growth as well as enhance political support for globalization in the developing world.

Despite the gains in living standards of recent decades, the World Bank and most experts estimate that roughly half the world's population still lives on less than $2 a day, and 20 percent lives on less than $1 a day. Some analysts contend that these numbers overstate the problem, perhaps by as much as half. But even using the more conservative estimates, an enormous and unacceptable number of people are still living in poverty, often without adequate access to clean water, basic health services, and so on—and the greatest benefits of globalization and growth have too often accrued to relatively few. However much progress there has been, it clearly has not been nearly enough.

For many years, it seemed to me that the well-off in developing countries too often viewed these terrible disparities as acceptable. But on trips to a number of developing countries in more recent years, I've noted a growing and by now substantial recognition on the part of many business people that they're not going to have the kinds of economies or societies they want unless they become more effective at dealing with poverty.

There remain enormous uncertainties about how best to come to grips with these problems. In the fall of 2002, some members of my old Treasury team—Larry Summers, David Lipton, Tim Geithner, and Caroline Atkinson—got together at Larry's house in Cambridge to discuss some of these issues in relation to this book. During a spirited four-hour discussion, it was striking that even as well-versed as all of these people were on the subject, their views sometimes conflicted and they recognized large areas of uncertainty. Most serious-minded experts acknowledge that there's simply a great deal they don't yet know about poverty and growth in the developing world. We all agreed that certain factors—such as global integration and market-based economics, at least reasonably effective government, some level of social cohesion, a decent and broad-based education system, basic health care, sound fiscal policy, and a high savings rate—tend to figure prominently in rapid economic progress. What is much less certain is how to encourage countries to pursue the kinds of policies and conditions most strongly correlated with success.

It is also unclear why apparently similar reforms have produced such widely varying results across different countries. And perhaps the most challenging questions involve how to address the needs of the millions of poor people who live in countries with governments that, due to corruption or ineffectiveness, are unlikely to deliver reform. While emerging- market countries—and, for that matter, developed nations—all have less than perfectly effective government and at least some corruption, government that is fundamentally ineffective seems to preclude successful development.

   

BUT WHY DO MANY COUNTRIES that seem to choose sound policies not enjoy the same kind of progress as others? The “success stories” do seem to offer some guidance. One lesson that seems clear is that despite the problems associated with global integration, no economy has managed to grow in a sustained fashion without pursuing integration with the rest of the world, at the very least by promoting exports. In addition, increasing reliance on market forces has been central to improving economic performance. Even in Africa, where economic conditions have been so difficult for the most part, some countries that have embraced market reforms—such as Uganda and Mozambique—have achieved impressive levels of growth and significant improvements in health care and other social indicators.

In Asia, standards of living have grown steadily and in some cases dramatically over the past three or four decades, improving the lives of hundreds of millions of people. South Korea stands as a particularly vivid example: between 1960 and 2000, the country went from around $100 in per capita annual income to around $10,000, due in great measure to some degree of market-based economics, limited liberalization, and a strong export orientation. There were many other factors in the “Asian miracle” beyond freer trade and the integration of global markets. But the kind of growth that countries such as South Korea, Thailand, Malaysia, and Singapore have experienced simply wouldn't have been possible without elements of globalization.

A counterpoint to this is Latin America, which has had generally disappointing results, growing at relatively slow rates. Even during the reform era of the late 1980s and the 1990s, when most Latin American countries liberalized trade, promoted exports, and relied increasingly on private markets, these nations continued to have low growth rates—with the notable exception of Chile. As Larry said at our Cambridge meeting, Latin America remains something of an enigma for advocates of our approach. Our understanding of the difference between Asian and Latin American growth needs to be vastly improved in order to provide better judgments about development strategies and policies going forward.

Some have suggested cultural explanations for Asia's relative prosperity. Although this interpretation is in some ways hard to apply to a region that has such heterogeneous cultures, the strongest Asian economies generally have in common such traits as a strong work ethic, a dedication to education, and high savings rates. The success stories in Asia also tend to have less skewed wealth, land, and income distribution than much of Latin America, and many have implemented growth- and productivity-oriented policies and reasonably sound fiscal management over a long period of time. In addition, the foreign minister of one of Latin America's largest countries once told me that he thought that the difference between these two regions lay largely in the effectiveness of governmental structures and processes in Asia as compared to Latin America, and the comparative political inability in Latin America—despite great strides in recent years—to do enough of what was needed and at the same time maintain sound fiscal conditions.