(Archived Content)
FROM THE OFFICE OF PUBLIC AFFAIRS
LS-892We meet on the eve of the Annual Meetings of the World Bank and International Monetary Fund in Prague. In days gone by, these meetings were veiled in technocratic mystery, and few cared to look behind that veil. Today, they attract more attention, and rightly so. For, if successful economic integration between industrial and developing countries is the framing challenge of our time, then the institutions and policies being discussed in Prague will be at the very forefront of meeting that goal.
Against this backdrop, let me reflect today on the historic opportunity that globalization presents, and the implications for the international community as it considers how best to make economic integration succeed.
I. Globalization: the Promise and the Challenge
In considering these issues it is important to begin in the right place. It has been a touchstone of the Clinton Administration since its earliest days that globalization is happening, and that it offers limitless potential for raising the living standards and quality of life of every American and the global population as a whole. But we have also stressed that making economic integration work means making it work for people. In that sense, the question is not whether we should welcome the emergence of a truly global market economy -- but what kind of global market economy we should work to build.
Today, 1.3 billion people are living on less than a dollar a day. It is a crucial lesson of history that that number will not decline without rapid growth in the economies of which they are a part -- and they will not enjoy rapid growth without joining the global market. No country has lifted itself out of poverty in the past 50 years without substantial growth in exports, supported by integration with the global economy and coming to accept the norms of the global marketplace.
In that sense, the rising divergence in national incomes that we see today is not because more countries are integrating themselves with the global economy; it is because so many countries are not. But history has also shown that support for globalization need not and must not mean support for globalization willy-nilly.
We discovered in the United States in the 19 th century that the invisible hand of economic integration and markets needs a firm skeleton of rules and institutions to succeed. The spread of capitalism needs to be tempered by public purpose: by policies to make the process work for all of our people and by institutions and agreements that can give businesses and people a clear framework in which to operate. And as we are learning, the same must be true at the global level.
It is too easy to frame the false choice as one between unfettered, unregulated global capitalism, on the one hand -- and autarky and protectionism on the other. The reality is brighter, but also more complicated. If we want a vibrant, more truly inclusive global economy there is no alternative, for individual governments or for the international community, to finding some way in between these two extremes. There is no alternative to the pursuit of policies and institutions that will make globalization work, and will make it work for people.
As we have stressed time and again, this challenge is first and foremost a national challenge for countries. But increasingly, building the right kind of integrated global economy will also depend on the success of the international community in developing the right broader institutional framework in which global integration can take place.
Let me emphasize two crucial aspects of this global challenge: maintaining a strong and stable flow of capital to the developing economies; and ensuring effective support for development in the poorest countries.
II. Ensuring a Strong and Stable Flow of Global CapitalA well-functioning system for ensuring a strong and stable flow of capital to the developing economies will be a very important part of building a successful, truly global, economy. Access to global capital helps to finance trade. It is a vehicle for new technology, and a creator of new economic opportunities. What it must not be, in a more integrated global system, is a specter over the lives of the world's poor.
Both the economic and the humanitarian imperatives of a stronger international financial architecture were brought out very clearly in the recent financial crises in Asia and elsewhere. In that period, in very different parts of the world, millions of people who were just going about their business had their lives turned upside down -- because their countries' financial systems had been thrown into crisis. As a result, many now have an entirely reasonable conviction that millions of people should not have to live in fear of typhoons of man's own making.
The international community must work to provide maximum assurance that such crises will be less frequent -- and less costly -- in the future. And that, in turn, means having a clear understanding of what has caused them in the past.
There is now widespread agreement that the financial crises of 1997-9 were caused by two elements coming together. First, weakness in the fundamentals -- such as a questionable banking system, a domestic credit bubble supported by large amounts short-term external debt, an unsustainable exchange rate, or a deteriorating fiscal position -- coupled with a reassessment of the country's capacity to safely absorb foreign capital. And second, an element of panic, whereby the mode of domestic and foreign investors shifted from thinking about the economic health of the country to thinking about who would be the last out.
This understanding of the crisis is increasingly informing the reform of the international financial architecture. This shows itself in three fundamental ways:
- More effective means of preventing crises, through stronger surveillance, more focused on preventing the policies that enabled a panic in financial markets to have such effects. These include: a revolution in transparency that will make surprises less likely; the development of a wide-ranging framework of international codes and standards to provide benchmarks for national policies in areas such as bank supervision and securities market regulation; and more systematic incorporation of indicators of liquidity and balance sheet risks in IMF surveillance reports.
- Safer policies in the emerging market economies, as global understanding and surveillance of economic risks has increased. Notably: the ratio of external debt to foreign reserves has more than halved since 1996 in countries that have experienced liquidity crises; short-term debt as a share of total external debt, among the same group of countries, has fallen from 34 percent in 1996 to 18 percent in 1999; and some fourteen countries have moved away from unstable pegged exchange rate systems.
- An IMF that is better-equipped for modern crisis response: with the creation of the Supplemental Reserve Facility and the Contingent Credit Line, and last week's important IMF Board agreement on the reform of IMF facilities, the IMF now has tools that are a match for the new kind of crises -- but will not, as far as possible, distort the incentives of investors and governments. The IMF is increasingly oriented toward the provision of short-term, emergency finance, priced to discourage casual use, and encourage rapid repayment.
through stronger surveillance, more focused on preventing the policies that enabled a panic in financial markets to have such effects. These include: a revolution in transparency that will make surprises less likely; the development of a wide-ranging framework of international codes and standards to provide benchmarks for national policies in areas such as bank supervision and securities market regulation; and more systematic incorporation of indicators of liquidity and balance sheet risks in IMF surveillance reports. , as global understanding and surveillance of economic risks has increased. Notably: the ratio of external debt to foreign reserves has more than halved since 1996 in countries that have experienced liquidity crises; short-term debt as a share of total external debt, among the same group of countries, has fallen from 34 percent in 1996 to 18 percent in 1999; and some fourteen countries have moved away from unstable pegged exchange rate systems. with the creation of the Supplemental Reserve Facility and the Contingent Credit Line, and last week's important IMF Board agreement on the reform of IMF facilities, the IMF now has tools that are a match for the new kind of crises -- but will not, as far as possible, distort the incentives of investors and governments. The IMF is increasingly oriented toward the provision of short-term, emergency finance, priced to discourage casual use, and encourage rapid repayment. - Safer policies in the emerging market economies, as global understanding and surveillance of economic risks has increased. Notably: the ratio of external debt to foreign reserves has more than halved since 1996 in countries that have experienced liquidity crises; short-term debt as a share of total external debt, among the same group of countries, has fallen from 34 percent in 1996 to 18 percent in 1999; and some fourteen countries have moved away from unstable pegged exchange rate systems.
Moving forward, let me highlight three issues that must be at the frontier of architectural reform in Prague and beyond:
- First, having moved to reform both the nature of IMF surveillance and its finance, it will be appropriate to consider the nature of its programs, with a careful review of IMF conditionality at times of crisis. There are two issues here that are important. The first is the scope of conditionality -- the scale of our ambition with respect to the areas of policy that might be included in official programs. The right principle here is easy to state but hard to apply: it is necessary to include every condition that is essential to restoring confidence, and necessary not to include what is non-essential. The second issue is the right design of programs: the substance of the policies adopted in each case, be it the scope for fiscal stimulus, and the speed with which governments recapitalize the banking system
- Second, we need to work to deepen connections and involvement between the public sector and the private sector in this area: notably by increasing the IMF's knowledge of financial markets; by increasing the transparency of actions by the IMF and official sector; by improving means of communication between borrowing countries and their creditors; and by building on the experience gained in recent cases of debt restructuring -- the case law that has been developed with respect to private sector involvement in crisis resolution -- with a view to making the broad guidelines outlined by the G7 earlier this year more fully operational.
- Third, we need to address more fully the question of financial support recovery programs at a time of financial crises. The Multilateral Development Banks need to have the capacity to provide finance in such circumstances: to help cushion the fiscal impact that is often a necessary element of economic stabilization; to help underpin social programs and protect the most vulnerable in society; and to support financial sector recapitalization and restructuring. To this end, we believe that the MDBs should be considering how to expand the use of the emergency financial vehicles that they now have in place, and of the pilot programs they have introduced to make more innovative use of guarantees in support of policy reforms in emerging market economies.
- Second, we need to work to deepen connections and involvement between the public sector and the private sector in this area: notably by increasing the IMF's knowledge of financial markets; by increasing the transparency of actions by the IMF and official sector; by improving means of communication between borrowing countries and their creditors; and by building on the experience gained in recent cases of debt restructuring -- the case law that has been developed with respect to private sector involvement in crisis resolution -- with a view to making the broad guidelines outlined by the G7 earlier this year more fully operational.
Those who say that the global development effort has failed are badly wrong: in the past two decades, more people have been lifted out of poverty in China and other parts of Asia than at any time in world history. And babies born in the developing world today, on average, will live 20 years longer than those born in 1960 -- and are half as likely to die before their fifth birthday.
At the same time, it must today be acknowledged that in too many countries, particularly in Sub- Saharan Africa, the global development effort has not succeeded. Per capita incomes in Africa in the late 1990s were lower than they were thirty years ago. Average incomes for a region of 600 million are now only 65 cents a day. And across large parts of the continent, children are more likely to die before their first birthday than to learn to read.
In principle, the "new economy" holds out enormous potential for accelerating the convergence of the poorest countries, many of which have suffered from natural disadvantages as well as longstanding policy failures. Information technology could help isolated nations in Africa and elsewhere overcome the barriers of time and space in competing in global markets; and advances in biotechnology could help defeat the scourge of infectious disease. But when half of the world's population has yet to use a telephone, and 40 percent of African adults cannot read, there is perhaps an equal chance that technology will speed further divergence. We will not see that more inclusive outcome without concerted public action.
With the HIPC debt relief initiative for the poorest countries, and with the focus at the Okinawa Summit on the development challenge and the role of information technology, the challenge of integrating the poorest countries into the world economy has begun to receive the kind of attention that it requires. Issues relating to the poorest countries will be very much a focus of international financial discussions at Prague and beyond. Let me highlight three priorities that seem to us to be especially important.
First, maximizing the effectiveness of the HIPC initiative
In the period since the Cologne Summit, the enhanced HIPC initiative to relieve the debt of these nations has made major progress. But the job is far from over.
Specifically:
We must strengthen international agreement on clear and achievable conditions for the provision of debt relief, to ensure that funds are provided as rapidly as possible, while ensuring there are strong safeguards to maximize the chances of success. In that context we support the goal of 20 countries qualifying for the enhanced HIPC program, in accordance with the commitments made in Cologne and Okinawa, by the end of the year. And we expect that goal to be met.
At the same time, the true measure of the success of HIPC will not simply be whether a country has received relief, but how those resources are used, and whether the reforms that accompany HIPC are able to deliver durable poverty reduction and growth. In support of this more fundamental challenge, we urge the World Bank to move quickly to put in place a new lending instrument for providing concessional assistance to the poorest countries -- parallel to the IMF's new Poverty Reduction and Growth Facility -- that will help provide an effective World Bank vehicle for the priority social and structural conditions embodied in HIPC.
Perhaps most important, we believe that we need to take steps to ensure that countries that receive debt reduction do not get themselves into the same problem all over again. For this to be achieved, it is crucial that all of the IFIs get out of the business of defensive lending -- of providing assistance to countries simply in order that past official loans can be repaid. And that, in turn, requires that they be much more selective, for an appropriate period, about providing non-concessional lending to countries that have been recipients of HIPC relief. In this context we believe that we should agree on substantially increasing the World Bank's grant capacity in IDA for appropriate poor country cases.
Of course, none of this is possible without the necessary resources. It must be cause for great concern today that delays in US funding have already caused the program to stall, denying finance, today, to countries like Bolivia and Honduras. Let me once again urge Congress to approve the President's pending requests for HIPC funding and authorization now so that HIPC can go forward.
Second, increased support for the provision of global public goods
If there is a dark side of integration, then it is the broad class of cross-border problems that defy solution by individual governments and markets. Whether it is money laundering and financial crime, global warming, new killer diseases, or reductions in global bio-diversity - the solutions to these problems will be global public goods, requiring concerted global cooperation.
Many of these problems pose a particularly great threat to the poorest countries -- and are thus an especially fruitful area for the World Bank to expand its work. We have had enough successes, with the Consultative Group on International Agricultural Research (CGIAR) and the Green Revolution, the campaign to defeat river blindness in Africa, and the eradication of smallpox, to show that global public goods can be provided. But if the potential of modern science is to be realized, we will need global public institutions and actions of a kind very different from the standard country-by-country programs to which we have all become accustomed.
This is the animating idea behind President Clinton's Millennial Vaccines Initiative, with its emphasis on creating market incentives for the development of vaccines against the small number of diseases that account for more than a million fatalities each year, and on expanding the capacity to disseminate vaccines that already exist, notably through the Global Alliance for Vaccines and Immunization (GAVI). But vaccines are only one area. Agricultural, educational and environmental research are just some of the others.
As always, in the provision of public goods, financing will be a major challenge. In this context I salute the President of the World Bank, James Wolfensohn's commitment to assure that no well designed HIV/AIDS program in sub-Saharan Africa will go unfunded. What is crucial is that the Bank's shareholders must work to ensure it has the capacity to back up that pledge.
Specifically, while the World Bank's regular lending can continue to address Global Public Goods at the country level, the Development Grant Facility (DGF) already complements country lending with grant support for institutions uniquely positioned to contribute in this area, such as GAVI and CGIAR. We believe that the World Bank should support a multi-year program of significantly increased DGF funding targeted for global public goods in the areas of infectious disease prevention, environmental protection and agricultural research.
Third, and more broadly, the world is going to have to do more.
Too often, in recent years, the debate about international development assistance has been paralyzed by a stand off between two extreme views:
- First, that all that stands between the poorest countries and rapid economic growth is inadequate international financial support.
- Second, that their economic failures stem only from a lack of commitment and reform in the countries themselves - a failing that no amount of external support will fix.
It is time that we recognized that both views are right - and both views are wrong. On the one hand, no country will succeed without the right policies in place. Tempting as it is to believe that just providing support to governments and letting them use it as they see fit is enough, the overwhelming lesson of history is that it isn't so. All too often, natural resource windfalls have flowed into palaces and numbered bank accounts, producing little or no tangible benefit for a nation's people. Support needs to be targeted to countries and policies with a proven capacity to deliver results, and that conditions are appropriate when assistance is provided.
At the same time, those who preach self-reliance need to recognize that the most committed governments in the poorest countries today face problems that they will not come close to addressing without major outside support. And we all must face up to the fact that there are high return investments in growth and poverty reduction that are not being pursued in the poorest countries today, at tremendous human and economic cost, because of a lack of official resources.
At a time of unprecedented economic prosperity, we recognize that this is a challenge that the world's richest country has a particular responsibility to confront. Strong support for development and for international development institutions has been central to a vision of closer integration of nations and shared global prosperity upon which United States foreign and economic policy has been based for the bulk of our postwar history. We neglect the long-term benefits of maintaining that commitment at our peril. Thank you.