11 January 1999
"Moving Towards Global Stability"
Speech to the Institute of International Bankers, New York.
I am grateful for this invitation and for your kind welcome. The start of a New Year is typically a time for looking forward. It is a time to reflect on the events of the past year, and to look to the year that lies ahead.
But these are not ordinary times, and predicting what the next twelve months will hold for the world economy is not a simple task. Rarely has the international system been as dramatically shaken as it was by the financial crisis of last year. South East Asia continued its economic slide; Russia was thrown into turmoil; Japan's economy stagnated, contagion threatened to spread to China and Latin America; western stock markets rose and fell then rose again all with unpredictable timing. If the crisis underlined the reality that we live in a global economy, it also underlined the reality that this global economy is still a very fragile one.
Yet behind the complexity and contradictions of last year's crisis, behind all the discussions and debates, there was really one central theme which emerged - can we continue to build an open world economy without a more stable financial system? Since Mexico's financial breakdown in 1994 a succession of crises has raised legitimate concerns about the fragility of the present global system. How can we avoid future crises? Do they reflect systemic weaknesses in the international economy - as well as the problems of individual countries? And can we manage the new global economy with our existing rules, procedures and institutions? All these questions go to the very heart of the central debate of our time which is the challenge of managing a globally interdependent economy.
The good news, as we begin the New Year, is that the atmosphere of consternation appears to be receding, especially in the presence of buoyant stock markets. Recent exchange rate movements, in particular the rise of the Yen versus the US dollar, have improved the competitiveness of the developing Asian countries and reduced the risk of a devaluation of the Chinese Yuan. Inflation is not out of control in the crisis-hit countries. High interest rates are starting to moderate. Asia in general and the 5 most affected countries in particular have substantially increased their trade surpluses. And this surplus is being used to build up foreign exchange reserves which is contributing to the increasing confidence in local currencies a precondition for lower interest rates and a return of foreign investors.
And yet, if a measure of stability has returned to some Asian countries, the global repercussions of the crisis remain. Seemingly every month, growth forecasts for the world economy are revised downward. The IMF last estimated that world output will grow by just 2.2 per cent in 1999, but well below the 4.7 per cent achieved in 1997 a rate which reflects in particular the significant decline in developing countries' growth. Nor do these figure take into account the possibility of new risks to the world economy in the months ahead - a return of financial instability, a sharp stock market correction, social unrest, or a resurgence of protectionism.
William Daley, the US Commerce Secretary, has rightly warned that "last year's financial crisis could become this year's trade crisis". Already the growth in world trade volumes has been cut by more than half - from 10 per cent in 1997 to 4 per cent in 1998 - because of the financial crisis and the decline in global output growth. And as global economic activity weakens and regional cycles diverge, trade and current account imbalances will increase creating new pressures and uncertainties in the trading system.
If the repercussions of the crisis were not worse it was largely because of the strength of the US economy. This reality together with the Federal Reserve's timely move to lower interest rates, the response of the G-7, and the reforms of the crisis-hit countries themselves - all played a part in helping to arrest the downward spiral and to strengthen international confidence. Yet the question remains - does this improved situation today represent the end to financial instability or simply the calm before the next storm?
A fundamental priority is to keep markets open and the trade system functioning smoothly. Trade is like the circulatory system of the body. If the blood does not flow, then no amount of medicine will cure the patient. The last year has tested the resilience of the trading system, and governments' commitment to it. So far the trade architecture has tested sound. There has been no backtracking on obligations under the WTO Agreements. On the contrary, we have registered some important progress most notably, the far-reaching agreement to liberalize trade in financial services in December 1997.
The future trade agenda can also provide an important framework for restoring growth - and in particular for helping the crisis-hit countries to trade their way out of difficulty. That is why the success of the WTO's Third Ministerial Conference to be hosted by the United States in November of this year - is so important. Already governments are committed to a very ambitious programme of work - including an assessment of how to improve the implementation of the Uruguay Round commitments, and further negotiations in agriculture, services and aspects of intellectual property. Members have also begun considering whether to broaden that agenda - possibly to include issues like industrial tariffs, electronic commerce, investment and competition policy. At the same time, there is a new urgency to accelerating the accession process to bring China, Russia, and the 28 other candidates into the security of the trade system's rules on terms which maintain the integrity of those rules.
In the context of current international financial instability, the new services negotiations in the year 2000 especially financial services have taken on a new urgency. Our first priority must be to consolidate what has already been achieved. As a result of the negotiations, 102 WTO Members representing 95 per cent of the world market - made binding commitments to liberalize their financial services trade. The Agreement is to come into force on 1 March if the ratification procedure is completed by all the countries concerned by the end of this month. At the moment, every effort is being made to ensure that deadlines are met. The entry into force of the Agreement would be a powerful signal of governments' resolve to strengthen their financial sectors in this difficult environment.
There will be two priorities in future negotiations. First of all, the right of establishment and operation remains essential for the provision of many financial services - and Members will undoubtedly seek to widen the scope of existing commitments. At the same time, technological advances in telecommunications and informatics are radically transforming the manner in which financial services are traded, and enhancing the importance of cross-border delivery. Members are bound to seek greater security with regard to cross-border trading rights - an issue which is also relevant to the ongoing WTO work on electronic commerce.
Why is progress so important? Because this Agreement is basically about providing countries with the tools they need to build stronger financial systems - by introducing greater competition and choice in the financial service market; by enlarging the presence of foreign banks, insurance companies and securities firms; and by building this new, stronger financial infrastructure on a firm foundation of agreed multilateral rules. Many countries still lack the necessary rules and structures needed to support a modern, open economy. Financial services liberalization can be an important step in the right direction.
Let me be clear. There can be no solution to global financial instability unless we keep world markets open and the multilateral trading system strong. Yet, at the same time, our ability to maintain an open world economy will depend on our ability to increase financial stability. In a world where a quarter of global output is now exported, where over one trillion dollars move around the planet every day, and where major currencies can fluctuate dramatically within months or even weeks, the cost of instability and crisis is great. Trade growth has been more than halved and growth itself has been sharply cut more or less everywhere in the world. Protectionist tendencies, especially in advanced economies are growing, weakening the support for liberalization and openness, and threatening the fragile ties which bind this global economy together. Most important, the social cost of the financial crisis has been unacceptably high especially for those developing countries which, until very recently, were pulling themselves out of poverty and unemployment.
The reality is that globalization and technology have fundamentally changed the context in which the international trade and financial system operates, and in ways that are not always fully understood. Currency traders, international investors, multinational firms all of these actors operate in a global economic space driven by instantaneous communications and information, while governments still operate under national constraints, with a much different set of priorities. Existing international rules and institutions were created for a different time and a different world. More and more our globalized world is being shaped by the private sector, while the international system was designed mainly to deal with intergovernmental relations. The challenges we face are formidable but unavoidable.
Just 11 days ago, something new has been introduced to the world economy the Euro, the most significant change to the international monetary system since Bretton Woods. The creation of the Euro represents the accomplishment of a long, difficult, but visionary chapter of the European history - a chapter which has seen a devastated and divided continent transformed into a single, open and democratic community of nations. Eleven countries with different histories, languages, traditions, and levels of economic development have willingly merged their currencies and monetary policies so that collective sovereignty might be harnessed behind a larger goal - the goal of lasting prosperity and peace for all Europe. No one can pretend that the road ahead will now be an easy one. No one can imagine that such a revolutionary process can be advanced without difficulties. But no one can doubt that this unity will transform the future of the European continent and, in a certain sense, the future of the world economy.
It is misleading and dangerous to portray the creation of the Euro as a major challenge to the dollar or to American economic leadership. European unity has been a major goal of American policy since the Second World War - beginning with the Marshall plan, and progressing through the Treaty of Rome, the Customs Union, the Single Market initiative, and now the Single Currency. What happened 11 days ago is also a major tribute to the hundreds of thousands of American soldiers who twice in this century, came to Europe to fight and die to restore peace and freedom.
The Euro should also been seen as a major step towards giving Europe a chance to share in a more equitable way its responsibility for the management of the world monetary system and the world economy. It is unavoidable that Europe will have to become even more outward looking in the Euro era. It will have to confront in a way that was less urgent or immediate before - the many fundamental challenges which the new complex reality has put in front of us. To meet this formidable task, we need more transatlantic and global cooperation, not less.
As I said at the beginning, today we are having to revisit the same fundamental challenge which preoccupied the architects of the post-war economic system, but on a much broader and a more complex scale: How to provide a strong and more stable international economic framework for growth, trade, development, and employment in an ever-more interdependent world?
Last September, Alan Greenspan argued that "it is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress". This statement clarifies the nature of the problem we face. The US economy, like every other economy, is now an indivisible part of a global system, and we must all see international interests as central to our national interests. Lasting prosperity and stability for the United States, as for everyone else, will be illusory unless we achieve prosperity and stability for the global economy as a whole.
The point is that our mental, as well as our institutional, landscapes must change. We need a new vision for this interdependent world - as far-sighted as the vision which guided the Bretton Woods architects a half century ago, as ambitious as the accomplished dream which now unites Europe with a single currency.
The nature of the challenge is both political at the highest level - and economic. It is about what kind of a world we want to shape for the beginning of the new century and the new millennium. We have been confronted, for almost 40 years after the Second World War, with the challenge of managing a divided world. We have succeeded. We are now confronted with a new challenge, perhaps even more difficult, to manage an ever-more integrated world. Many ideas have been announced and many more are taking shape. Improving the stability of the global system is at the centre of this debate, even if there is not yet a consensus on how to proceed. But the debate, it seems to me, is only beginning. Thank you.