U.S. Department of the Treasury

(Archived Content)

Good morning. I am glad to have anopportunity to talk to you today about the economic dimension of American nationalsecurity policies as we approach a new millennium. Not so long ago it would have been asurprise to see senior Treasury Department officials on the platform at such a conference--an even bigger surprise if they actually made a relevant contribution.

Perhaps today will seem no different.Butthen the blame will be squarely with me: for if there is one lesson to draw from thesepast five years it is that we cannot afford to draw a line between our economic policiesand our national security.

There is a sense in which we nevercould:our economic health has always played a vital role in underwriting our security. Theargument I would like to make today runs deeper, and to the very heart of thisAdministration’s international goals. Briefly, it is that the end of the Cold War andthe embrace of free markets around the world may well have put us in an era in which it isnot merely unwise to separate narrow economic interests from strategic ones --it isimpossible.

Those two seismic events have helpedsetoff a tide of global integration with enormous potential. But it is not enough to watchthat tide wash away the remnants of the old order. As the President said last week in hisaddress to the United Nations General Assembly, we have to decide what will be left in itswake.

As he said then, to seize theopportunities, and defeat the threats of this new global era we need a new strategy ofsecurity --one aimed at forging a new network of policies and institutional arrangementsto secure and strengthen the gains of democracy and free markets and turn back theirenemies. The United States has a vital interest in helping to build this new foundationfor global security and prosperity. And we believe that proactive, internationalisteconomic policies can play an integral role in bringing it about.

I. The First Lesson of History:Economic Failure Breeds Political Instability

The crucial link between economics andnational security is this: we are much less likely as a nation to be drawn into conflictif nations of the world are strong, and are forging ever closer connections, than if theyare financially unstable and disconnected. Throughout history there has been a strongcorrelation between financial crisis and political disorder --and between disorder andwar. Failing states, with crisis-prone economies, tend to lose their political legitimacy.This breeds instability, and with it a strong chance of internal or external aggression--possibly both.

There are many ways to make this point.Perhaps the strongest, most positive lesson comes from the European experience after 1945.Before that time modern European history was scarred by repeated descent into war. Manyfactors helped forge a more a new more stable era in Europe in the years following WorldWar II. But I believe that a critical element was the economic vision shown by a few onboth sides of the Atlantic. This was a vision that supported rapid economic rebuilding asessential to normalization and prosperity; increased economic integration, so people stoodmore to gain from shared peace than from divisive conflict; and the creation ofinstitutions, such as NATO, and the Bretton Woods organizations, that could help to bringnations together to resolve their conflicts.

The absence of these things stand out inthe regions that represent some of the greatest security problems today. In Bosnia,Central Africa and elsewhere, economic crisis has combined with political fragmentationand conflict, often posing severe risks to the stability of neighboring countries. TheBosnian conflict escalated as it did, in large part, because of the lapse intohyperinflation in 1989, and the failure of the West to offer debt relief to supporteconomic stabilization. The economy provided cover of chaos for leaders whose nationalistagenda promised a simplistic recipe for restoring order.

And yet, postwar Europe and otherexamplesshow that the link between economic failure and political conflict can be reversed, tobecome a force for peace. Many have seen this process at work in Northern Ireland, wherethe revival of investment and closer ties with the Republic which occurred during therecent cease-fire greatly strengthened opposition to renewed hostilities.

The corollary of these arguments is that,when historians look back on this era, it may not be the end of the struggle between twopower groups that they see as the most salient event. Instead, the prize might well go tothe embrace of market-based economics, not merely within the former Soviet bloc, but by somany people around the world. This presents all of us with a historic opportunity to enjoythe security that comes from being part of a more prosperous and integrated globaleconomy.

There are some who believe that weneed donothing but watch this process of faster development and integration unfold. I believethis is too optimistic, for three reasons.

First, as we have learnt in the yearssince the Berlin Wall came down, the transition to a market economy is not a single,straight and narrow path. Moving from one kind of society to another is a fraught, oftendestabilizing process. This is particularly true in the early stages, when the costs ofreform may be more visible, widely felt, than the benefits. The international communityhas a strong role to play in supporting the efforts of reformers, helping them winlegitimacy early and tocultivate the institutions and public goods needed for capitalismto flourish.

Second, while it is true that economicdevelopment can promote stability --history provides all to many cases where it hasdelivered the opposite. In fact, rising economic strength, and major changes in theeconomic balance of power will usually fuel conflict when there is no effort to give allcountries a stake in further development and to foster mutual trust. The fact thatJapan’s dramatic postwar development --and the more recent expansion of other Asianeconomies -has been achieved without the bloodshed we saw in the first half of centuryspeaks to the steady progress which these economies have made toward openness andintegration. Since 1985, fully half of Japan’s foreign investments are estimated tohave been made in Asia.

In a best-selling book, a Britishjournalist, Norman Angell, argues, convincingly, that increased economic integration hasmade war between nations so costly as to be impossible -- our fortunesare too closely tied. In recent years many have written similar books. ButAngell’s is the more troubling. For his book, The Grand Illusion, waswritten about the countries of Europe, in 1910.

Then, as now, trade accounted forupwardsof 30 percent of the larger European economies’ national income, and a very largeshare of that trade was with each other. Financial integration was likewise well advanced:foreign borrowers accounted for 86 percent of the funds raised in the London capitalmarkets in the first quarter of 1914.

In his book Angell gave what turned outtobe a very accurate prediction of the financial turmoil which war with Germany wouldproduce. He was wrong only in the belief that the economic lunacy of war made itimpossible. On the face of it, closer integration did nothing to prevent Europe marching--with equally mistaken optimism --into the war to end all wars.

Historians will argue about the chain ofevents leading Europe into war in 1914. I would add just two salient points. The first isthat the integration the European economies enjoyed then did not have the political orinstitutional underpinnings it has today, or that we are working to promote elsewhere.Increased integration was occurring despite the strongly protectionist outlook of mostcountries --and without any international institutions, such as the United Nations or theWorld Trade Organization, to foster greater cooperation and mutual trust.

This lends hope that the integration ofthe last years of this century will prove more enduring and stable than that of itsearliest few years. But as this audience knows better than most, war has almost alwayscarried a very heavy economic price --for the victors as well as the losers. The level ofdebt we inherited from World War II is testament to that. The economic costs have notprevented those conflicts from taking place. We cannot guarantee, in any of ourinternational policies, that they will not do so again. But by helping the internationalcommunity take on the many economic challenges this new global economy presents, we candramatically reduce the risk of conflict. I would like to saw a few words about the threemajor ones.

Fifty years ago the United States helpedlay the economic foundations for peace in Europe. We are doing the same today, providingfinance, and underwriting reform and reconstruction, in Russia, Ukraine, Bosnia and othercountries in the midst of economic transition. My focus today has been on the economiccomponent of this strategy. But clearly the enlargement of NATO is an equally importantpart of our efforts to lay the grounds for stability --just as its creation helped fosterpeace in the years after the war.

In some ways the need to supporteconomicreforms and ensure they are cemented in strong public institutions extends much furthertoday than the Marshall Plan ever did. As several commentators have remarked, the wars ofthe 1990s have been largely fought within countries rather than between them. These civilwars come not from the excessive ambition of states but their extreme weakness. And, asthe Bosnia case has shown, they can erupt anywhere -- although the risk must be higherstill where entire groups of countries have been left out of the global movement towardeconomic development and stability.

Sub-Saharan Africa provides the clearestexample. In recent years we have seen a string of countries in the region collapse underthe weight of decades of economic decline and political dictatorship. But we have alsoseen a growing number of countries undertake market reforms, and begin to reap thebenefits of increased access to global markets. We all have a strong stake in ensuringthat this last process has the more lasting domino effects.

Here, as elsewhere, some of this effortwill be bilateral, as was true of the Marshall Plan. But a major part of the job is donethrough multilateral development banks such as the World Bank and the European Bank forReconstruction and Development. In many ways, those institutions are to the new post ColdWar world what security institutions to the earlier one.

The voices which call for us to withdrawfrom these institutions, and which have sought to block America’s ability to meet itscontributions --are terribly short-sighted. Some have compared the provision ofinternational aid to throwing money down foreign ratholes. To which I wouldrespond: many of yesterday’s ratholes are today’s emerging markets. Consider therole that the international financial institutions have played in the success stories ofSouth Korea, Chile, Indonesia and others. Poland, which was able to borrow from the IMF in1990 as part of its stabilization program, is now growing at 6 percent, and has repaid themoney in full.

Let me be clear. While it will often bethat our economic support is the cheapest investment we can make in our future security,and while the prospect for economic progress will often determine how successful our moremuscular interventions prove to be in the long run, it is important to recognize thatselectivity must be applied in the economic, as in every other arena. Neither we, nor theinternational institutions, can remake every economy in difficulty, or rebuild every weakstate. But choosing well our priorities will be critical --not only to husband ourresources, but because the creation of successful examples becomes ever more important ina world of increased migration and communication across borders.

For the first time in history theworld’s capital market is now truly global. Some trillion dollars pass throughinternational exchange markets each day. Funds for investment are flowing more freely, tomore countries around the globe than at any time in history. Yet for all the opportunitiesthis new global finance affords, it also raises dangers. The Mexican crisis of 1994provided a clear example of these --the recent travails of Thailand and several of itsSouth-east Asian neighbors have provided another.

The founders of the IMF and otherBrettonWoods institutions after World War II understood the need for international mechanisms tosafeguard against economic shocks and their contagion effects. Just as when a run on abank occurs here at home, it is vitally important for the US economic security --and thatof the whole world --that the capacity exists to provide liquidity when crises erupt instrategic and financially important regions.

The IMF must remain the focal point ofsuch emergency response systems, if the United States is not to bear the burden alone. Atthe Halifax Summit, President Clinton led the G-7 leaders in pressing to find ways toenhance the IMF’s capacity to respond to crises such as Mexico’s. These effortshave already borne fruit.

Let me repeat: preventing financial crisesis not simply in Wall Street’s interest, or main street’s interest. It is vitalto our national security, if we are to prevent key regions from lapsing into thetotalitarianism --or outright chaos --that financial crises can produce. Hitler did notcause the German hyperinflation of the early 1920s or the financial and economicdepression of the early 1930s --but he surely profited from them.

I have spoken of the critical need for ashared political commitment to closer economic integration, to encourage economicdevelopment and place it on secure foundations. Many industrialized nations have voicedthe same fine sentiments in recent years. Unfortunately, actions too often diverge fromwords.

If we want other nations to open theirmarkets --we must open our own. If we want sensitive regions to stabilize, we must allowthem to enter the world trading system. Putting aside the economic harm we do to ourselveswhen we retreat behind barriers, it is tragically short-sighted for industrializedcountries to jeopardize so many regions’ chances of lasting integration andprosperity by throwing hurdles to trade in their path. Trade diplomacy is a valid tool,but only --but only --so long as market opening is the ultimate goal.

The United States is the most openmarketin the world. This, and our rising economic competitiveness, put us in the pole positionto benefit from efforts to reduce trade barriers and foster increased integration. This iswhy we worked to achieve strong international agreements to liberalize trade intelecommunications and information technology in the WTO, and why we are pressing for anequally strong agreement in financial services.

The same objectives underpin our effortsto set the stage for closer integration across the Pacific by reinvigorating APEC --and topromote increased integration in our own hemisphere, through NAFTA and the proposed FreeTrade Area for the Americas.

It is vital that the President regainfast-track authority from Congress so we can continue to play a leadershiprole in regional and multilateral moves toward closer integration. The optimists may beright. The forces leading to closer integration may be unstoppable this time. But if thereis subtler lesson to be drawn from the outbreak of World War I it must be thatglobalization alone does not safeguard stability. It requires a network of policies andinstitutions to cement the integration process and guide it forward.

If fast track would be a source ofsecurity and perpetuation of American values, a failure to pass fast track would make usless secure. We would put at risk what might be called the Clinton Corollary to the MonroeDoctrine --the idea that the United States should be the major trading partner of LatinAmerica. We would raise serious questions about America’s role in Asia at a moment ofenormous flux. We would call into serious question the prospect for future global effortsto bring trade barriers down and nations together.

One thing is certain: our abdication fromthe trade agreement arena would greatly reduce the prospect that the international tradingregime would increasingly reflect the importance of labor rights and environmental values.Ultimately our challenge is to be the first continental, outward-looking, non-imperialpower in history. Without an ability to work for open markets, it will be that much moredifficult.