25 October 2001
Text: Federal Reserve's Greenspan on Globalization, Terrorism
(Terrorism can reverse globalization gains, he says) (3410)
Terrorism cannot be allowed to reverse tangible gains of
globalization, U.S. Federal Reserve Board Chairman Alan Greenspan
says.
In a late October 24 speech to the Institute for International
Economics, Greenspan said that letting terrorism discourage domestic
and cross border activities "could reverse at least part of the
palpable gains achieved by postwar globalization."
He argued that free trade as a powerful force for prosperity had
significantly contributed to improvements in the quality of life. He
viewed greater longevity, a universal system of education, vastly
improved conditions of work and the ability to enhance natural
environment as major globalization gains in democratic capitalist
countries.
Taking issue with globalization opponents, Greenspan rejected their
arguments that state intervention would alleviate the alleged failures
of free trade. "One would be hard pressed to cite examples of free and
prosperous societies that shunned the marketplace," he said.
He added that developing countries need more globalization, not less,
because it was likely to bring greater economic stability and
political freedom.
The chairman reiterated his support for launch of a round of
multilateral trade negotiations when World Trade Organization (WTO)
ministers meet in Doha, Qatar, November 9-13.
"I trust that we will go forward expeditiously with the pending new
trade round," Greenspan said. "The differences to be resolved in such
talks are small relative to the larger issue of maintaining our
freedoms to travel and trade on a global scale."
Greenspan admitted that globalization was "an exceptionally abstract
concept" to the general public. He warned that making clear that
globalization can spread worldwide the values of freedom and civil
society would continue to be a great challenge.
Following is the text of Greenspan's speech as prepared for delivery:
(begin text)
Remarks by Chairman Alan Greenspan
Globalization
At the Institute for International Economics' Inauguration of the
Peter G. Peterson Building, Washington, D.C.
October 24, 2001
I am pleased to be with you tonight as the Institute for International
Economics dedicates this extraordinary new building. I am also pleased
to note that you are celebrating your twentieth year in the business
of thinking critically about vital international economic issues. It
hardly seems that long.
Before the tragic events of September 11, discussions of the
international economy had increasingly come to be centered on issues
related to the growing integration of our economies. The strife we had
witnessed over economic globalization was the twenty-first century's
version of debates over societal organization that go back at least to
the dawn of the industrial revolution, and many of the intellectual
roots of those debates go back far longer.
There has been a simmering down of the more vociferous protests
against globalization since September 11. But the debate surrounding
the increasing cross-border integration of markets inevitably will be
rejoined. The issue elicits such strong reaction because it centers on
the important question of how economies are organized and,
specifically, how individuals deal with one another.
Globalization as generally understood involves the increasing
interaction of the world's peoples through their national economic
systems. Of necessity, these economic systems are reasonably
compatible and, in at least some important respects, market oriented.
During the past half-century, barriers to trade and to financial flows
have generally come down, resulting in a significant broadening of
world markets. Expanding markets, in turn, have enhanced competition
and nurtured what Joseph Schumpeter called "creative destruction," the
continuous scrapping of old technologies to make way for the new.
Standards of living rise because the depreciation and other cash flows
of industries employing older, increasingly obsolescent, technologies
are marshaled, along with new savings, to finance the production of
capital assets that almost always embody cutting-edge technologies.
This is the process by which wealth is created incremental step by
incremental step. It presupposes a continuous churning of an economy
in which the new displaces the old.
The process is particularly evident among those nations that have
opened their borders to increased competition. Through its effect on
economic growth, globalization has been a powerful force acting to
raise standards of living. More open economies have recorded the best
growth performance; in contrast, countries with inward-oriented
policies have done less well. Importantly, as real incomes have risen
on average, the incidence of poverty has declined.
Nevertheless technological advance and globalization distress those
who once thrived in industries that were at the forefront of
technology but which have since become increasingly noncompetitive.
In each step of incremental advance, the distance between gainers and
losers is necessarily narrow. So it is understandable that our
exceptionally complex system for the international distribution of
goods, services, and finance is not universally recognized as
successful at enhancing standards of living and promoting civil values
worldwide. Indeed, those who perceived the need to protect economies
from open trade have endeavored since its inception to slow or even
reverse the forces supporting global expansion. It would be most
unfortunate if the wheels of progress were stopped because of an
incapacity or unwillingness to assist those disadvantaged by these
broader gains, an issue I will address later.
In recent years, protectionism has also manifested itself in a
somewhat different guise by challenging the moral roots of capitalism
and globalization. At the risk of oversimplification, I would separate
the differing parties in that debate into three groups. First, there
are those who believe that relatively unfettered capitalism is the
only economic organization consistent with individual and political
freedom. In a second group are those who accept capitalism as the only
practical means to achieve higher standards of living but who are
disturbed by the seeming incivility of many market practices and
outcomes. In very broad brush terms, the prevalence with which one
encounters allegations of incivility defines an important difference
in economic views that distinguishes the United States from
continental Europe -- two peoples having deeply similar roots in
political freedom and democracy.
A more pronounced distinction separates both of these groups from a
third group, which views societal organization based on the profit
motive and corporate culture as fundamentally immoral.
This group questions in particular whether the distribution of wealth
that results from greater economic interactions among countries is, in
some sense, "fair." Here terms such as "exploitation," "subversion of
democratic choice," and other value-charged notions dominate the
debate. These terms too often substitute for a rigorous discussion of
the difficult tradeoffs we confront in advancing the economic welfare
of our nations. Such an antipathy to "corporate culture" has sent tens
of thousands into the streets to protest what they see as "exploitive
capitalism" in its most visible form -- the increased globalization of
our economies.
Though presumably driven by a desire to foster a better global
society, most protestors hold misperceptions about how markets work
and how to interpret market outcomes. To be sure, those outcomes can
sometimes appear perverse to the casual observer. In today's
marketplace, for example, baseball players earn much more than tenured
professors. But that discrepancy expresses the market fact that more
people are willing to pay to see a ball game than to attend a college
lecture. I may not personally hold the same relative valuation of
those activities as others, but that is what free markets are about.
They reflect and give weight to the values of the whole of society,
not just those of any one segment.
Market doubters sometimes respond that consumers' values are
manipulated by corporate advertising that induces people to purchase
goods and services they do not really want. Most corporate advertising
directors would wish that were true. Instead, they will argue that the
evidence suggests that only the best products in the marketplace win
over time. Consumers are not foolish; indeed, it would be an act of
considerable hubris to argue otherwise.
What are the dissidents' solutions to the alleged failures of
globalization? They are, in fact, seemingly quite diverse. Frequently,
they appear to favor politically imposed systems, employing the power
of the state to override the outcomes arrived at through voluntary
exchange. The historical record of such approaches does not offer much
encouragement. One would be hard pressed to cite examples of free and
prosperous societies that shunned the marketplace.
Contrary to much current opinion, developing countries need more
globalization, not less. Such a course would likely bring with it
greater economic stability and political freedom. Indeed, probably the
single most effective action that the industrial countries could
implement to alleviate the terrible problem of poverty in many
developing countries would be to open, unilaterally, markets to
imports from those countries.
Setting aside the arguments of the protestors, even among those
committed to market-oriented economies, important differences remain
about the view of capitalism and the role of globalization. These
differences are captured most clearly for me in a soliloquy attributed
to a prominent European leader several years ago. He asked, "What is
the market? It is the law of the jungle, the law of nature. And what
is civilization? It is the struggle against nature."
While acknowledging the ability of competition to promote growth, many
such observers, nonetheless, remain concerned that economic actors, to
achieve that growth, are required to behave in a manner governed by
the law of the jungle.
In contrast to these skeptical views, the ethical merits of
market-driven outcomes are argued with increasing vigor by many
others, especially in the United States: The crux of the argument is
that because unencumbered markets reflect the value preferences of
consumers, the resulting price signals direct a nation's savings into
those capital assets that maximize the production of goods and
services most valued by consumers. Largely unfettered markets create a
consumer-led society. In such an economy, the value of reputation,
capitalized as good will in the market value of companies,
competitively encourages perseverance in pursuing the objectives of
quality and excellence. Moreover, the limited role for government in
these arrangements is conducive to greater political freedom.
Such a paradigm, however, is viewed by many at the other end of the
philosophical spectrum as obsessively materialistic and largely
lacking in meaningful cultural values.
But is there a simple tradeoff between civil conduct, as defined by
those who find raw competitive behavior demeaning, and the quality of
material life they, nonetheless, seek? It is not obvious that such a
tradeoff exists in any meaningful sense when viewed from a longer-term
perspective.
Clearly not all activities undertaken in markets are civil. Many,
though legal, are decidedly unsavory. Violation of law and breaches of
trust do undermine the efficiency of markets.
But solid legal foundations and the discipline of the marketplace
limit these aberrations. On net, vigorous competition over the years
has produced a significant rise in the quality of life for the vast
majority of the population in market-oriented economies, including
those at the bottom of the income distribution.
During the past century, economic growth created resources far in
excess of those required to maintain subsistence. That surplus in
democratic capitalist societies has, in large measure, been employed
to improve the quality of life along many dimensions. To cite a short
list: (1) greater longevity, owing first to the widespread development
of clean, potable water, and later to rapid advances in medical
technology, (2) a universal system of education that enabled greatly
increased social mobility, (3) vastly improved conditions of work, and
(4) the ability to enhance our environment by setting aside natural
resources rather than employing them to sustain a minimum level of
subsistence. At a fundamental level, we have used the substantial
increases in wealth generated by our market-driven economy to purchase
what many would view as greater civility.
If the issue of a tradeoff between growth and civility were not in
dispute, much of the debate that surrounds globalization today would
have long since been silenced in its favor.
But even if open and free global markets are consonant with political
freedom and have in the past contributed greatly to raising world
standards of living, there still remains the important practical
issue: Can globalization continue to work? Is it as viable a model for
world economic growth now as it has been in the past? Despite
globalization's patent capacity to elevate standards of living over
time, we have been challenged by periodic disruptions in the system's
functioning. The financial crises of 1997-98 and the stresses apparent
in some emerging-market economies over the past year underscore
evident structural weaknesses in our global system.
It can readily be argued that certain conditions of stress increase
the probability of emerging-market country default and potential
contagion. For example, extensive short-term foreign currency
liabilities of financial intermediaries that are used to fund unhedged
long-term lending in a domestic currency are tinder awaiting
conflagration. This is especially the case if foreign currency
reserves are inadequate and exchange rates are fixed.
But why has this phenomenon in different garb reappeared so frequently
in the postwar era? No nation deliberately seeks to expose itself to
financial distress and bankruptcy. But political pressures can lead to
actions that increase these risks. In all economies, political
constituencies seek to employ the powers of the state to increase
their share of limited government resources. While the record of
developed economies is far from unblemished, they have had greater
success in fending off such demands. One indication of that success is
that exchange rate regimes have not often been upended by domestic
political pressures in these economies.
Although the range of outcomes has been wide, many emerging-market
nations have had less success in insulating their international
financial positions from domestic political pressures. Those
pressures, at times, have become exceptionally difficult to deal with.
To close the gap between the financial demands of political
constituencies and the limited real resources available to their
governments, many countries too often have bridged the difference by
borrowing from foreign investors. In effect, the path of least
resistance has been external borrowing rather than confronting
politically difficult tradeoffs.
Periodically, as an economy borrows its way to the edge of insolvency
with debt denominated in foreign currency, government debt-raising
capacity appears to vanish virtually overnight. It is this vanishing
capacity that characterizes almost all financial crises. Lending
institutions will provide funds beyond the immediate visible
short-term cash flow of a borrower only if they perceive that maturing
debt will be capable of being rolled over. The first whiff of
inadequacy in debt-raising capacity induces a run to the exits -- not
unlike a bank run. Thus, an economy's necessary condition for
solvency, indeed, a necessary condition for the stability of global
finance, is the maintenance of significant unused financing capacity.
A developed nation's financial status is largely defined by an
unquestioned capacity to roll over its debt seemingly without limit
into the future. Developed nations, of course, have on occasion run
into refunding difficulties and found international lending markets
closed. But those occasions have been rare.
What then is an adequate buffer? What level of foreign currency
reserves and tradeable real assets does an emerging-market economy
need to obtain and sustain debt-capacity credibility? That level, of
course, can be known only in retrospect. One measure of the
probability that the current or prospective level of reserves will be
adequate can be gleaned from the yield spread of dollar-denominated
government debt over U.S. Treasuries. That spread reflects not only
the risk of dollar credit default but also the underlying strength of
the domestic currency. Exchange-market pressures on the latter
obviously reduce dollar debt-raising capacity.
Debt capacity, by this model, is reached before rising nominal
interest rates and, hence, payments on government debt threaten a
vicious fiscal cycle of ever-growing deficits and debt. Unless debt
capacity is continuously confirmed in the marketplace by modest
spreads, "bank run" crises seem inevitable in such a leveraged system.
How then does an emerging-market nation obtain and sustain
debt-capacity credibility? First, it needs to create a much larger
relative reserve buffer than that of a developed nation -- which has a
larger capacity to draw on real resources, through taxation if
necessary, to make good on its obligations. Nations that have met the
market test no longer need to put up "collateral" to certify their
financial prudence. Of course, even adequate or outsized reserves may
not be perceived as sufficient for some, if the political system is
judged unstable.
In this regard, there are two critical criteria that all lenders
require for government debt issuance: (1) a legal system that is
presumed to protect property rights of the lender through the maturity
of the debt instrument and (2) if the debt is denominated in a foreign
currency, a fiscal and monetary regime that is presumed to be
sufficiently responsible to ensure repayment in equivalent real
resources.
To be sure, one can borrow with these conditions less than fully
satisfied, but only at interest rates that price the risk. Too often
these rates are at levels inconsistent with fiscal stability or
ongoing debt-raising capacity.
At root, debt-raising capacity is not a technical issue; it is a
profoundly political one, which means that it is driven by the values
and culture of the society. Unless consensus exists within a society
as to resource limits to which all must adhere, an adequate
debt-capacity buffer will be difficult to achieve and maintain.
The United States has benefited enormously from the opening up of
international markets in the postwar period. We have access to a wide
range of goods and services for consumption; our industries produce
and employ cutting-edge technologies; and the opportunities created by
these technologies have attracted capital inflows from abroad. These
capital inflows, in turn, have reduced the costs of building our
country's capital stock and added to the productivity of our workers.
It would be a great tragedy if progress toward greater openness were
stopped or reversed.
Rather than inhibiting international competition to assist those
displaced by "creative destruction," we should be directing our
efforts at enhancing job skills and retraining workers -- a process in
which the private market is already engaged. If necessary, selected
income maintenance programs can be employed for those over a certain
age, where retraining is problematic. Protectionism will only slow the
inevitable transition of our workforce to more productive endeavors.
To be sure, an added few years on the job may enable some workers to
reach retirement with reasonable security and dignity, but if we
hinder competitive progress, we will almost certainly slow overall
economic growth and keep frozen in place younger workers whose
opportunities to secure jobs with better long-run prospects diminish
with time.
Terrorism poses a challenge to the remarkable record of globalization.
A global society reflects an ever more open economic environment in
which participants are free to engage in commerce and finance wherever
in the world the possibilities of increased value added arise. It
fosters ever greater cross-border contact and further exploitation of
the values of specialization but on a global scale.
Fear of terrorist acts, however, has the potential to induce
disengagement from activities, both domestic and cross border. If we
allow terrorism to undermine our freedom of action, we could reverse
at least part of the palpable gains achieved by postwar globalization.
It is incumbent upon us not to allow that to happen.
I trust that we will go forward expeditiously with the pending new
trade round. The differences to be resolved in such talks are small
relative to the larger issue of maintaining our freedoms to travel and
trade on a global scale.
Globalization admittedly is an exceptionally abstract concept to
convey to the general public. Economists can document the analytic
ties of trade to growth and standards of living. A far greater
challenge for us has been, and will continue to be, making clear that
globalization is an endeavor that can spread worldwide the values of
freedom and civil contact -- the antithesis of terrorism.
Globalization, in addition to its myriad material benefits, needs to
be seen as a reflection of human freedom in economic terms by a vast
majority of its participants. It needs to be seen as offering
opportunities to raise the standards of living of all participants in
the world trading system. If we fail to make that case, renewed
barriers to commerce could fill the void, and the advances associated
with globalization could be slowed or even reversed. Should that
occur, a few might be better off. Surely, the world will not.
(end text)
(Distributed by the Office of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)
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