Transcript
MR. ROBERT LITAN: I'm Bob Litan. I'm director of Economic Studies at Brookings. And in anticipation of the IMF-World Bank meetings next week, we thought it would be useful to give a backgrounder from several different perspectives of people that are at Brookings or who have been affiliated with Brookings in one manner or the other. And we have four very distinguished experts to offer their views.
And the format's going to be this:
We're just going to have three or four minutes of opening remarks from each person, and then, unless anybody feels strongly compelled to disagree with their colleagues up here, what we're going to do is just open it to you and have a dialogue, so that we can get your questions answered.
We're going to start with Ralph Bryant, who is one of our experts on international finance. And he is finishing a book right now that hopefully will be available in the fall, on international financial architecture.
Then we're going to go to Carol Graham, who is a specialist in Latin America and also developing—(off mike)—director of our Center on Social and Economic Dynamics at Brookings.
I'll offer my own thoughts at the end.
Then we're going to go to Karin Lissakers. Karin—actually, I just learned Friday was her last day on the job as the U.S. executive director of the IMF. So she is ideally positioned to discuss what she thinks will be on the agenda for next week's meetings.
And finally, we have Shang-Jin Wei from Brookings, who is our expert on global corruption. And it's a new hot topic that he has written extensively about.
And in fact, on that note, we have several policy briefs in your packet, two of them—one of them from Carol, one from Shang-Jin, on subjects that they're going to talk about. They're in draft form. And finally, you have a policy brief that I co-authored on responding to worker anxiety here in the United States.
So with that introduction, let's start with Ralph and go right down the row.
MR. RALPH BRYANT: My conjecture about spring meetings is that lots of the discussion will be about the world economic situation, do we face a world slowdown or not, et cetera, et cetera. There are plenty of hot spots in the world economy. We could think about Japan and Argentina, Turkey. We could make a long list.
I didn't think I would try to say anything about that, but we can all respond to questions on that subject. But that's probably one of the main things that will get discussed.
The other main set of issues have to do with what's come to be termed "international financial architecture." Many of the topics under that broad heading have to do with financial standards and codes, and the prudential oversight of financial institutions and financial systems.
Within nations, we take it for granted that that we need a governmental and legal infrastructure, if I can use that term, to establish financial standards and to be sure that we implement prudential oversight of financial institutions.
Substantial effort in the last several years has gone into nurturing the beginnings of infrastructures for the world as a whole. I think progress has been genuine and more significant than most people realize, and it's proceeded on a multiplicity of institutional fronts. There are, of course, many very difficult issues to be resolved, and some of those are on the agenda for these meetings.
The second broad category of topics is about the management of financial crises. I think you can probably expect to hear something in particular about—again, the jargon used here is "involving the private financial sector in the management of crises." That has to do with whether if there is lending by institutions like the IMF that "bails out"—to use the provocative term—private lenders and, hence, leads to moral hazard issues, or can we "bail in" the private lenders in some way, being sure that they participate in concerted lending and help with resolution of financial crises, if they do occur.
Then the third broad category of issues, which is on the agenda too, falls under the heading of the surveillance of national economic policies and the terms and conditions associated with IMF and World Bank lending. And a particular subject there is the conditionality that gets associated with IMF lending; can we do something to streamline and improve conditionality, for example.
The way I think about surveillance, that broad set of issues, is I use the analogy of the activities of fire-fighting departments in local governments who are charged with extinguishing unexpected damaging blazes; that's crisis management. In contrast, surveillance over the economic financial policies of the national government is more like the monitoring and enforcement activities of local police departments and local traffic regulators. Super-national surveillance, especially by the international institutions, seeks to encourage countries' compliance with evolving international norms, it monitors cross-border traffic regulations, and it's appropriate in non-crisis conditions as well as crisis conditions.
The philosophy about surveillance you can think of as related to that old venerable catechism about what sailors should do in a hurricane. If you ask, "What do you do if you find yourself to the windward of an island in a hurricane," the venerable response is always, "You do not find yourself to the windward of an island in a hurricane." So a lot of the focus of surveillance is to try to prevent crises from emerging.
I think I'm going to go on to a more general set of remarks, but if there are questions about any of those areas of architecture, we could come back and I can try to answer them there.
I wanted to just say something in general about the IMF and whose institution it really is. I think you can look backwards over the last several decades and see a drift in the IMF; it's increasingly become engaged in the promotion of growth, in structural reform, and in reduction of poverty in developing nations, and that's led many people to see the IMF, I'm afraid, especially in the United States, as an institution whose clients are just the developing nation. That misimpression, I think, is very unfortunate, and it leads to a mistaken corollary that somehow the IMF exists because the large wealthy nations contribute their resources to it. And then a still more simple-minded and unfortunate caricature is that the IMF is a charity run by the wealthy nations for the benefit of poor nations.
The caricature that the only nations benefiting from the assistance of the IMF are the developing nations is fundamentally wrong because it fails to recognize all the other activities of institutions like the IMF, particularly crisis management and supranational surveillance.
And I think the worst thing about this caricature of these institutions is that they're—you know, it's a badly distorted view about what the selfish interests are of the industrial nations themselves. I believe that the wealthiest nations have the most to gain from a healthy, stable evolution of the world economy, and I think that's what these international institutions like the Fund and the Bank are trying to promote.
We have in the United States the most to lose if the world economy functions very badly. So nurturing a gradual strengthening of collective surveillance over these policies is really important. And that requires countries like the United States to have an increased and more thoughtful support of the IMF, not at all some of the very critical things that you can hear, for example, in the U.S. Congress.
I stop there. I think there are many things one could say about all these questions, but let's go on to you, Carol.
MS. CAROL GRAHAM: Thanks.
I guess I'm going to focus on a slightly different aspect of the meetings, which is all the talk about the protests around the meetings or potential protests around these meetings, around past meetings. And really, I think, the underlying concern is not whether there are teenagers protesting on the streets of D.C. or Quebec, but basically the extent to which these protests really reflect broader and more widely held sentiment against globalization in the public—in publics at large. I think in the U.S., one of the primary fears about globalization has to do with worker dislocation and trade-related adjustments. Bob, I think, will probably address that, or if not, he has certainly addressed it in his policy brief.
What I wanted to say a few words about today was what do we know about what publics in the developing countries think about globalization, or what are their opinions? Do their opinions about globalization reflect those of the protesters?
I think as a starting point, it's important to note that in the past decade, that the majority of voters in both Latin America and Eastern Europe have repeatedly endorsed market reforms and integration into the world economy in election after election, and that basically it's the outliers that are voting governments that support market policies out. That said, there are some new concerns about support for globalization market reforms in some of these economies. Case in point is the rather unexpected but, unfortunately, quite strong support for Alan Garcia in Peru, and Peru being one of the countries in Latin America that's gone the furthest in implementing market reforms and integrating into the global economy.
So I would say that the electoral record thus far has been to support countries' integrations into the global economy, but there are some causes for concern. Argentina, which Ralph mentioned, is another one.
That said, what's really happening on the ground with globalization in these countries, and what are people thinking? First of all, the protesters claim that globalization is bad for poor people in poor countries, yet the evidence suggests exactly the opposite. So, why the discrepancy?
I think one reason is that actually the results are mixed, in the sense that some income groups and some sectors of the economy do better than others, and so there are winners and losers. But certainly the poor in general fare very, very well with market reforms and globalization. And there are three reasons for this.
First of all, the poor were least able to afford the costs of high inflation, fiscal mismanagement, the sort of pre-reform policies in a lot of countries. Secondly, merely by introducing market incentives in a lot of these countries into things like labor markets and credit markets, you often are able to remove distortions that were blocking low-income and small-scale users. And thirdly, and I think the most important, is that ultimately growth is a necessary, if not a sufficient, condition for poverty reduction. And from what we know across country evidence, globalization is good for growth in developing economies.
That said, it's clear that the turn to the market and globalization creates new opportunities for low-income people to move up the income ladder. And in my brief, I discuss in detail exactly how extensive these opportunities are, and they're actually quite impressive if you look at the evidence. But there are also both old and new vulnerabilities. There are other people that, due to changes in the economy, fall back, and often they're people in the middle-income sectors rather than the poor. So here are the mixed results that drive some of the concerns about the effects of globalization.
Related to that, another part of the story, is increasing disparities to skilled and unskilled labor. A secondary education in many developing countries no longer guarantees a stable middle-class existence, something that a decade ago was indeed the case. And now the rewards, with the turn to the market and integration in the global economy, are to higher-skilled workers; people with a university education. And we're seeing large gaps between people that finish secondary school and people that finish university. And at this point, people that finish secondary school do about as well as people that finish primary school. So there's a new—sort of a new kind of reward and changes in rewards to different education groups that's having a significant impact on how people fare in developing economies.
Another part of the story is top driven inequality. If you look at developing countries, and particularly Latin America, what drives the inequality in these countries is the difference between the top decile and the rest of the distribution; it's not sort of inequality throughout the distribution. So we see very large rewards to people at the very top, and it's people at the middle that are most aware of this.
Okay, the last topic, and I guess sort of the crux of this, is what do people in developing countries think about all of these trends, what are their perceptions? Well, we did a couple of surveys in Peru and in Russia, two emerging market economies that are quite different, but we got very similar results, and what we found was very surprising. We found that at least half of the people in our surveys with the mo