September 19, 2001
The Asia Society Hong Kong Center 11th Annual Dinner
I want to thank the Asia Society for gathering together such an illustrious group. I want to particularly thank Ronnie Chan who has managed to organize me to come here. He invited me last year and unfortunately I could not come. This year I also had an invitation to go to Mainland China to attend a conference on the role of China in the twenty-first century; and also my book Open Society, Reforming Global Capitalism was published in Mainland China, so that was an occasion that I could not miss and I am very happy that it coincided with your dinner and that I could attend this occasion as well.
I was going to talk about my views on China and the importance of the concept of open society for China today. The fact that my book was published in China shows that there is in fact a movement towards a more open society. But the fact that some sections were left out also indicates that there is still a long way to go. I think that China is opening up externally, such as in its efforts to join the WTO, but it is also tremendously important that it should open up internally, even before it opens up externally. This is particularly true as far as its financial system is concerned. We have learnt in other Asian countries like Japan, Korea, and several Southeast Asian countries, that if you have a financial system and financial institutions that were established in isolation, they can be devastated when the system opens up to external competition. Thus, it is very important to establish a financial market internally in China before it opens up, which according to WTO rules will be in five years time. But I think that this opening has to go beyond markets and it has to involve freedom of speech and the free flow of information because without it, I do not think that China can continue to flourish in the more open environment that it will join.
In fact, I was looking forward to dispelling the myth that seems to surround my name in this part of the world. When I was in Mainland China, I discovered that I am very well known by both ordinary people as well as the elite, but unfortunately, I am known as the “crocodile!" Frankly, I am more bemused than hurt by this because I think the myth is so far removed from reality that it does not touch me personally. Nevertheless, I am not too pleased about it. I guess it is due to Mr. Mahathir who finds it convenient to blame me for the failures of his administration. I think the Asia Society is a wonderful forum in which to continue this sort of dialogue which was started by Mahathir when I was last in Hong Kong at the annual meeting of the World Bank in 1997. I suppose I should be grateful of Mahathir for making me famous in this part of the world. But frankly, as I said, I do not like the image that he has created for me so I would like to fire him as my publicity agent.
Yet, everything that I had planned to discuss this evening has been overshadowed by the horrific events of September 11th, and I think that there is really no point in discussing any subject without putting it into the context of this devastating event. I think one responses to a trauma of this kind on two levels: one is on a sort of animal level which you feel in the pit of your stomach; and the other is on a more reasoned intellectual level which is supposed to go on in your brain. Yet, when you experience a really traumatic event, it is often difficult to separate out these two types of responses. I remember one occasion when I witnessed the death of a baby in a hospital. I went there to be of assistance but it was I who ended up needing assistance. This is the sort of shock that one can feel during these traumatic events. And because of the images we have all seen on the television, I think that to some extent we have all had this kind of reaction; yet eventually, when the shock wears off and I hope reason will take over. I am sure you want me to give you my view of the economic and financial implications of this event and I will do my best, but I am not sure that I really have anything new to say on the subject.
In my view, this event will reinforce the trends which were already in place. That is to say we were already in a bear market, the consumers were already beginning to pull in their horns and we were entering sort of the second leg down of the recession. and the financial authorities were already providing both fiscal and monetary stimulus. These trends have now been given new impetus and they are being reinforced. So what I expect is a process which is steeper, deeper, but hopefully shorter; because if people, for instance, don’t travel and don’t spend money it creates pent up demand. So it is going to be weaker near term and stronger longer term. The long-term effects I think will greatly depend on how we respond to this traumatic event. The early signs are that the financial system has withstood the trauma and is functioning well. There may be some delayed effects on the willingness to lend and to invest, but the most important factor is how we are going to respond politically and militarily. Now whether one responds on the instinctual level or the rational level, we must fight terrorism. There is no alternative. We must engage in a concerted effort to eradicate organized terrorism, but we must also realize that it is going to be extremely difficult to capture Bin Laden “dead or alive,” because Afghanistan is very inaccessible, it is really a mountain pass out in the middle of the continent. The only viable ground opposition to the Taliban was Ahmad Shah Massoud. Yet, Bin Laden recently sent two suicide bombers, two journalists as you know, who blew him up and he has died. I think air attacks are largely useless. I knew a French woman doctor who was working with Massoud during the Soviet occupation of Afghanistan. She worked for an organization called Aide Medicale Internationale (AMI) that I was supporting and she told me how they lived. They were basically living in caves in the mountains, and at night they went down and tilled the soil. They survived the daily bombing raids of the Soviet army pretty well. I think sealing off Afghanistan holds more promise because although the borders are porous, you cannot carry things like fuel over the mountain passes. So I think you could seal off Afghanistan, but that would mean a long siege and we would have to be patient and persistent, and above all, we must avoid creating civilian casualties and demonizing Islam. I am hopeful that this, in fact, will be the policy that the U.S. government follows.
I think we have to look at Bin Laden as a kind of evil genius. I compare him to Hitler at one extreme and the Unibomber, Ted Kaczynski, at the other extreme. A big difference is that Hitler was able to actually cause much greater destruction than Bin Laden ever will, whereas Ted Kaczynski has disappeared from the pages of history without practically a trace. Yet, there was nothing really very special about Hitler. I recently read his biography, and I was struck by how in his early years he did not really differ very much from a number of other drifters who had similar ideas. The fact is that there were a number of people who had similar ideas and he was able to tap into a reservoir of real or imaginary grievances, and that is what propelled him into a position where he could really exercise his evil genius. So, I think this is a very important point that we must recognize: it is not enough to fight terrorism, we must also address the social conditions that provide a fertile ground from which volunteers who are willing to sacrifice their lives can be recruited. And, here, I think I do have something to contribute to the debate because I have been actively engaged through my network of foundations in trying to improve social conditions in a number of countries where the foundations are operating. I have also spent a lot of time and effort in the last few years trying to analyze the deficiencies of the global capitalist system-that is the uneven playing field, the growing gap between rich and poor and the instability of financial markets to alleviate these problems. I have to admit that my book was a little weak on the prescription side but since it was published I have been working on making my prescriptions more precise, and I have been formulating a set of proposals that could actually be implemented. I am currently engaged in writing a report on globalization. While it has not been fully completed, I think this is the right moment to submit it-even if it’s in draft form-for public discussion, because we must match the war on terrorism with constructive steps to improve the world in which we live.
Now we live in a world characterized by global markets, but political arrangements are firmly grounded in the sovereignty of states. Global markets require international institutions capable of sustaining them. We do have such institutions, such as the WTO and the IMF, although they are in need of some strengthening and reform. By contrast, the international institutions dedicated to other objectives are far less effective and less well endowed. The disparity between our international financial and trade institutions and our international political institutions has rendered the development of our global society very lopsided. International trade and financial markets are very good at generating wealth, but they cannot take care of other social needs, such as the preservation of peace, alleviation of poverty, protection of the environment, labor conditions or human rights-what they generally call “public goods.” Now prior to the globalization of financial markets, the provision of most public goods could be left to the governments of the individual countries, but now that financial capital is free to move around, it is difficult for individual countries to impose taxes and regulations because capital can go elsewhere. The ability of capital to move around freely undermines the ability of individual states to ensure the provision of public goods. That is particularly true in less developed countries. Therefore, we need to create international mechanisms for the provision of public goods on a global scale. That is the missing component in our current institutional arrangements.
There has been a lot of discussion about the so-called Tobin tax on currency transactions. I think there is a case for such a tax, not only on currency transactions, but also on all financial transactions. But it is different from the one that has been put forward by James Tobin. It is not at all clear to me that a Tobin tax would reduce volatility in the currency markets. It is true that it may discourage currency speculation but it would also reduce the liquidity of the marketplace, so that chunky transactions, such as mergers and acquisitions, would have a greater impact on exchange rates. The case for a Tobin-type tax is different. The globalization of financial markets has given financial capital an unfair advantage over other sources of taxation. A tax on financial transactions would redress the balance. Why should there be a Value Added Tax (VAT) but no tax on financial transactions? On these grounds, the tax ought to be extended to all financial markets and not only currency markets. There are, however, many serious problems concerning the implementation of a Tobin tax. How to tax derivatives and synthetic instruments? How to collect the tax? Collection has to be worldwide including tax havens. How to enforce the tax? The collecting country has to be given a share of the proceeds. How big a share? All these problems could be resolved but they could also serve as an excuse for not introducing a Tobin tax. Moreover, it is not enough to introduce a tax; we must also ensure that it is put to good use.
For all these reasons, I should like to put forward another proposal, without necessarily dismissing the Tobin tax. I propose issuing Special Drawing Rights or SDRs that the rich countries would pledge for the purpose of providing international assistance. This is an initiative that could make a substantial amount of money available almost immediately. In 1997, IMF member governments agreed to a one-time special allocation of SDRs, totaling approximately $27.5 billion. This is slightly less than 0.1% of the global GDP. Members having 71% of the total vote needed for implementation have already ratified the decision. All it needs is the approval of the United States Congress. I propose that President Bush introduce and Congress approve a special allocation of SDRs and all the richer members of the IMF pledge to donate their SDR’s for the alleviation of poverty and other approved objectives. To be successful, the special issue of SDRs would have to be accompanied by a new approach to managing international assistance. I propose creating a kind of market where initiatives compete for donors’ funds.
This is how it would work. An international board operating under the aegis of the IMF, but independent of it, would be set up to decide which programs would be eligible for donations of SDRs. The Board’s members would be eminent persons appointed on their merit. The Board would not only decide on the eligibility of programs, but would also arrange for their monitoring and evaluation. It would not, however, have any authority over the spending of the funds. The allotment of the SDRs would be left to a market-like interplay between donors and applicants. I cannot go into all the details, but special arrangements would have to be made to encourage and empower good government. Because although we are reluctant to talk about it, bad government is the single most important cause of poverty in the world today. If the scheme is successfully tested, it should be followed by an annual issue of SDRs and the amounts could be scaled up so that they could have a meaningful impact on many of our most pressing social issues. This is the cornerstone of my plan.
I have several proposals for the strengthening and reform of our existing institutions. In the case of the IMF, I argue that the present arrangements have created a very uneven playing field. The center, that is basically the United States, is in charge and although the U.S. monetary authorities are concerned with global conditions, their primary responsibility is to foster prosperity in the United States. This gives the United States a decided advantage. Countries at the periphery of the global financial system often run into difficulties. In the past, the IMF used to bail out these countries at a heavy price for the countries concerned. In the course of the emerging global market crisis of 1997-99, it came to be recognized that bailouts create a moral hazard. Namely, the lenders might extend unsound credit in the expectation that in the case of trouble, the IMF would come to their rescue. It did so in Mexico in 1994 and it was expected to do so in Russia in 1998. But the IMF took a 180-degree turn. Instead of bailing out, it now wants to bail in the private sector. This change in direction will ensure that there will be no repetition of the emerging crisis that ended in bust in July 1997. The danger now comes from the opposite direction-from the inadequate flow of capital to the emerging market economies. This is already happening. Taking resident lending, portfolio investment and private credit flows together, there has actually been a net outflow from emerging markets since 1997-going from a positive $81.7 billion in 1996 to a negative $104.7 billion in 2000, offsets by slightly larger inflows of foreign direct investment and by official financing. I believe that the elimination of moral hazard is a positive step because IMF bailouts were debilitating for the debtor countries. But it is not enough to insist on burden sharing by the private sector. The private sector is not a charitable institution. If it has to bear a burden, it will charge for it. That is why the cost and availability of capital has moved against the emerging market economies. Market discipline needs to be complemented by guarantees and other credit enhancements in order to create a more even playing field. Again, I do not have the time to go into details or to discuss the role of the WTO or the World Bank. The point I want to make is that there are deficiencies in our international arrangements that urgently need to be addressed.
We need to hunt down Bin Laden and resist international terrorism. We should not become so preoccupied with raging war as to forget about the constructive steps that we could take to alleviate social ills in the world. Improving social conditions will not prevent people like Bin Laden from exercising their evil genius. But it will help to alleviate the grievances on which extremism of all kind feeds. And quite apart from the terrorist threat, it will help to make the world a better place.