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Al-Ahram Weekly 27 Jan. - 2 Feb. 2000 Issue No. 466 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 27 Jan. - 2 Feb. 2000 Issue No. 466
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Features Profile Travel Living Sports People Time Out Chronicles Cartoons Letters New economic realities
By Ismail Serageldin *
At the beginning of our new century, people knew what others were doing at any point in the globe, courtesy of CNN and other global media. Such incredible advances in telecommunications are one facet of the emerging globalisation that thrills so many, yet causes anxiety for so many more.
What will the future portend? Will it bring "The Millennium" to all the world's peoples or will it exacerbate the inequities that we see on the rise everywhere, in all countries?
Strangely enough, the very aspects that are actively promoting inequities, and could entrench and consolidate the power of the rich and the technologically advanced, are the same that hold the keys to universal progress and increasing equality. Indeed, there is now an increasing level of disquiet about the negative aspects of globalisation, that are making the celebration of the incoming of the millennium an opportunity to rethink the way the world economy is being run and how people deal with global inter-governmental relations.
A time for change
The recent crisis in the financial markets in East Asia marks the end of an unprecedented era of naive belief that free capital flows and unfettered markets are the cure-all for the world's ills. The private sector was going to solve all problems, if only governments would get out of the way -- this naive view had gained wide acceptance in a wave of triumphalism that had followed on the heels of the collapse of the Soviet Union and the socialist model of economic management. The proponents of that triumphalist view succeeded in pushing the pendulum far in the direction of a libertarian "governs best that governs least" extolling the laws of the jungle in the transaction of human affairs. They lumped together the advances made in improving the human condition in the liberal democracies of the West with the failures of communist regimes. They threw the baby out with the bath water, and as the world was moving into an era of the first truly integrated global markets, they repeated at the level of the newly emerging global economy what we saw of capitalism at the national and international levels from the nineteenth century to the great depression of the 1930s.
Lessons from the past
"...exploitation of the world market [has] given a cosmopolitan character to production and consumption in every country. To the great chagrin of reactionaries, it has drawn from under the feet of industry the national ground on which it stood. All old-fashioned industries have been destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations... In place of old wants, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations."
Contemporary as they sound, these words do not come from the present. They are from Karl Marx's The Communist Manifesto of 1848. The pangs we are feeling today are remarkably similar to those felt in the industrial revolution two centuries ago. The question before us is whether we have learned from that experience to design a more humane way of dealing with the inevitable wrenching that accompanies such processes.
Forging a better future
To avoid repeating the problems of the industrial revolution, we must harness the emerging universal values of our common humanity and create a coalition of the caring.
We must recognize that the private sector will not take care of public goods, and that the public must remain engaged to deal with market failures and public goods.
We must change the calculus of our economics and finance, to internalise the full social and environmental cost of our decisions. Some headway is being made on this at the local level, but we have certainly not even begun to introduce the global costs of local actions at the level of national policy. We must rectify national accounting that values a forest as zero unless it is chopped down.
We should measure the growth in our capital stock not just the growth in the volume of our activities. We should be as concerned with nurturing natural capital and building human and social capital as we are about economic growth.
And all of this is possible. It will not diminish the vibrancy of the entrepreneurial spirit, nor will it curb economic growth -- a prerequisite for effective action against poverty, nationally and globally. But it will help make new investments environmentally friendly and socially responsible.
Neither will such measures affect any of the benign aspects of globalisation, which remains an important positive force in today's world. Small countries from the developing world can escape limited domestic markets by selling to the whole world. They can tap endless sources of funds if they have the ideas and the abilities. The premium on the knowledge-based societies of the future means that they will be less dependent on their specific natural resource endowments. But all of that will favour the nimble and the educated. So how does it square with the experience and practice of development?
As the new century begins a global consensus on many aspects of economic policy is in place. Forged in the eighties and nineties, it is focused on sound macro-economic management reflected by exchange rate adjustment, fiscal rectitude, debt rescheduling and reduction, trade liberalisation and privatisation. The GATT Agreement of the Uruguay Round and the creation of the WTO enshrined the free trade outlook. The holy trinity of fiscal balance, trade balance and exchange rate balance became essential goals for all. But recent lessons in East Asia and the rising inequities being felt in many parts of the world underline that this model requires further refinement. The "Battle in Seattle" showed that the views of civil society now must be taken into account in making intergovernmental decisions, and that a more holistic view of development is necessary.
In addition, the qualitatively different reality of the emerging power of the global capital markets and the vulnerability of national economies to international competition has both good and bad aspects. We need to distinguish between the two, and avoid the type of dichotomisation that would put everything into an either/or mode. Globalisation is desirable, but so is caring for the vulnerable and the weak. Indeed, globalisation offers the developing countries many opportunities, but, in parallel, the global markets bring waves of volatility that bring as much "external shock" as they do "opportunity".
So what should developing countries do?
To respond to shocks and make effective use of new opportunities, governments must undertake effective action in some key areas.
First, credible macro-management of the economy: the preeminent role of government in setting and maintaining the proper macro-economic fundamentals is essential for any effective growth, as well as for a well-functioning competitive economy. The costs of inflation and over regulation tend to be felt above all by the poor.
Second, flexible institutions: the one common denominator of the global knowledge-driven economy of the new millennium is the pace of change itself. The successful, competitive economies of the future, those that will be creating the jobs and the prosperity for their people will be determined by the flexibility and responsiveness of their institutions -- institutions capable of recognising and interacting with emerging market opportunities halfway around the globe, or with new technologies such as the Internet, or satellite mapping and telecommunications that make the obsolescence of what we invested in an ongoing fact of life.
Third, facilitate the flow of knowledge and information: the world is awash with more information than ever before and governments that try to regulate that flow will be putting their enterprises at a distinct competitive disadvantage. The future will require more access to open communications and information at a speed that will defy our current thinking .
Fourth, investment in human and social capital: with so much emphasis being paid to promoting economic growth and protecting the environment we must reaffirm the essential role of human and social capital. The future is going to be a knowledge-based society, one that will require continuously upgraded skills. This means that education and health and nutrition of persons are a primary competitive asset as well as being the best investment that societies can make. Equally important is to strive to build up shared values and the legitimacy of institutions of mediation for these are the essential glue that binds societies together and allows them to function.
Free markets and competitive markets
There is a real need for a thoughtful critique of the current paradigm to redress the imbalance that would have us accept rising inequality, marginalisation and poverty of the weak as an acceptable sacrifice at the altar of ever greater consumption. There is a real need to tame the wild markets into humane competitive environments that bring the best out of each and to each.
Capital markets with non-stop daily trading of $1.4 trillion dollars is seen as the ultimate expression of our success. But the volatility of the markets, and the room it makes for speculators, must be questioned.
Anyone who claims that the best system we can devise is one that allows the yen/dollar exchange rate to fluctuate from 120 to 80 to 120 -- a swing of 50 per cent in each direction over an 18 month period -- must be asked to think again.
Anyone who claims that the disconnection between financial flows and actual trade and investment flows is insignificant must be asked to explain why arbitrage and rectification accounts for some 90 per cent of the transactions.
I would like to ban the term "free markets" from our lexicon because it has been misinterpreted in so many quarters. What we really mean is "competitive markets". If Wall Street represents the quintessential "free market", we would do well to remember that it is one of the most severely regulated. You have to file specified types of audited financial data. If a person acquires more than five per cent of the equity of a company it has to be publicly acknowledged. Insider trading is criminalised and prosecuted. Anti-trust laws to prevent monopoly are in place, and are enforced.
All competitive markets require an effective state apparatus behind them: property rights, binding contracts and an effective judiciary to name but a few. A totally "free market" is an invitation to predators, as we saw in the pyramid schemes that almost caused a civil war in Albania not too long ago.
Yet the international capital markets are more similar to those of Albania at the time of the pyramid schemes than they are to Wall Street. The volatility is unbelievable and the inadequacy of the current level of regulation practiced by the international agencies, especially the IMF, is obvious. There is an urgent need to strengthen that oversight and temper the volatility of the markets. This will require greater discipline from all countries, and a voluntary relinquishing of some of their sovereignty in the interest of all. But, specifically, what can be done to reduce the vulnerability of developing countries' economies to the volatility of the markets and external shocks?
Revisiting the Tobin tax
The Tobin tax, named after Nobel laureate economist James Tobin who first proposed it, would levy a very small amount (say 0.1 per cent) on each commercial transaction in the capital markets, to help reduce volatility. It was anathema to those pushing for unfettered markets at the global level. They claimed it would be unenforceable, that it would lead to cheating by some and therefore should not be enforced on anyone. It would, they said, be an enormous disincentives to the entrepreneurs who were the key to economic activity, and..., and...
All these arguments have a familiar ring. Anyone who knows anything about the arguments surrounding the imposition of income tax will recognise the same arguments almost word for word. Yet almost all societies in the world have adopted income tax and though it is true that some people cheat by and large it works reasonably well. And it does allow for a modicum of redistribution for the public good.
True, when income tax reached confiscatory levels it did act as a disincentive to investment and prompted all sorts of creative accounting practices, but overall, the rich were not impoverished, and the trust-busters did not pauperise the Rockefellers and the Fords.
As to its complications -- surely with the level of computerised systems that we have in place, the ability to guide a little robot in real time on Mars, and the increasing movement towards uniform reporting practices of financial data, and practically all financial transactions being done by computer, we are in a much better position to design and implement a variant of the Tobin tax today than we have ever been. I am fully aware of the problems of derivatives and the possibilities of the switching effects that a Tobin tax or similar measures could engender. But this is only an exploratory discussion, and the "new financial architecture", as it is now being called, should address issues of volatility and capital flows with some forms of new instruments.
Another criticism of the Tobin tax is more valid -- that it would provide a slippery slope for politicians, a temptation to start shifting the funding of programmes onto it rather than through more direct taxes and user fees, thereby undermining a necessary discipline in public financial affairs. The case of Value Added Tax (VAT) in Europe is instructive. Once in place, politicians have consistently jacked it up to levels that were never imagined at its inception. It is easier to add a tiny boost incrementally to an existing tax that operates on large base on many transactions than it is to cut back on government spending or to hit the population with a direct tax. So what of the Tobin tax? Will it be the international equivalent of the national VATs?
One way to guard against that would-be to agree up front that the proceeds of the Tobin tax go into a fund -- to be managed by the IMF and the World Bank -- whose sole purpose would be to fight the currency crises that plague the international system today. The beauty of this proposal is that it would remove the temptation to fund good international causes.
This proposal would link the size of the fund to the size of the markets. The larger the markets the larger the fund becomes. It would be accessible only by a decision of all the countries of the world, represented as they are on the boards of the IMF and the World Bank. It would also add credibility to the interventions of the international financial institutions. It would complement the necessary call for added IMF surveillance in this time of rapid movements and the blurring of the boundaries of conventional instruments of borrowing and equity finance all over the planet. But why, some may ask, the World Bank and not just the IMF alone? Because it is essential in these times of rapid change and occasional crises that the poor and the weak be protected. Changes in the structure of the economy, its pattern of public expenditure, and reforms in the parastatal and banking sectors must all be undertaken with a view of their impact on the poor. These are areas in which the World Bank, with its multi-sectoral expertise and developmental mandate, can play a very constructive role. Finally, making access to these funds subject to the agreement of the Executive Boards of both institutions makes such access exceptional event, one not approached lightly. It makes such a fund something to be approached only in exceptional circumstances.
This is not a call for a return to the era of the "gosplans", nor is it a call for abandonment of the markets as a key principle of economic organisation. It seeks constraint only to make international financial markets truly competitive. The question is whether those who are responsible for safeguarding the international system will show the necessary wisdom to tame the wild markets, and benefit from the next swing of the pendulum to help fine tune the transition to a truly global, smoothly functioning international market in capital, goods and services. It is time for these economic decision-makers to act wisely to protect the advantages of the "free markets".
In keeping with the words often addressed to jurists: "Go forth unto the world and fashion those wise constraints that make people free."
* The writer is a vice-president of The World Bank. The views expressed here are those of the author and should not be attributed to the World Bank or to any of its affiliated organisations. An earlier version of these arguments was presented in "The Swing of the Pendulum: Taming the Wild Markets", in Towards a Compassionate World, ed. Mahnaz Afkhami (forthcoming).
