No nuances; no caveats; no rhetorical defensiveness. Time does not permit it. Virtually every sentence can be qualified or, indeed, disputed—but the essence of my comments are a distillation of my own experiences. No pretense that I am right, and, indeed, my appearance of certainty masks a lot of ambivalence. I have eight points to make:
- While the U.S. may be the most powerful country in the world, others can control, thwart and affect, with relatively little pain to themselves, this country’s policies and initiatives. The global, financial, economic, trade, and investment links prevent any country from being immunized from conscious or non-targeted events which affect this country’s wellbeing.
- China, apart from the U.S., is the most powerful country in the world—in the context of its ability, if it wishes, to do great damage—because uniquely it combines five factors: 1) centrally controlled – a dictatorship; 2) materialistic; 3) it exploits and can make or dump what the world wants cheaply; 4) it is a huge market which has attracted hundreds of billions of direct illiquid foreign investment, now under its control. It is unlike, say France, Japan, Germany which are pluralistic societies, with competing vocal constituencies whose interests can pressure their governments. And China is unlike North Korea or Cuba or Iraq which, while controlled, have no economic power. Nor has Russia. China can dump rice or textiles or shut down a dozen countries in Asia with little internal pressures.
- Globalization—the links – the absence of currency, financial, trade, investment, restrictions—cross border—means not only contagion is endemic, but also overwhelms domestic fiscal or monetary policy which, by definition, is constrained to one’s own borders. It, therefore, makes outcomes unpredictable. Chaos theory. The pinball effect. Russia can’t meet a debt service payment, therefore Japanese banks in response to reduce their lines of credit to Korea, which prompts a huge withdrawal of short term funds all over the world from Korea, collapsing their economy and by contagion that of Thailand, which in turn affects investment values in Latin America as U.S. Government bonds, held as collateral on Repo’s are sold, driving up interest rates in the U.S. and badly hurting the U.S. stock market. Unpredictable event, outcome, uninsurable.
- Domestic interventions in an industrialized economy—say lowering interest rates to stimulate a weak economy is overwhelmed by external events and by the myriad of choices outside one’s own borders to invest in.
- The information revolution will create more volatility in markets, not less, as abberations disappear; we all get the same information at the same time. Everyone’s simultaneously processing same information. We all are buyers or sellers at the same time. Better the information flow. That means more volatility.
- Investments will flow to predictable or even exploitative places—places where monopoly is permitted (oil or natural gas rich countries) not necessarity pluralistic societies and not to countries in transition. Yes: China, Iraq, Iran, Libya (France). No: India, Russia.
- Investments which require a predictable civil rights, social, legal, tax, and property rights structure will have to wait a very long time in emerging markets. Jeffersonian democracy is a unique phenomenon which came out of historical, philosophical, cultural, religious circumstances, not readily imposed on other countries. Also, we had two hundred years to develop a consensus about the relative power of workers, owners, managers, government involving much violent conflict, and in a relatively isolated, non-global world. Mckinsey or Ernst & Young consultants not likely to impose what we call democratic pluralism in Vietnam or Russia.
- For those who say the IMF and World Bank have failed—witness all the poverty in the world—I would suggest that that position has about as much logic and validity as those who would point to the success stories over the last fifty years of France, Holland, Japan, Spain, Portugal, Finland, Israel, Korea – all recipients of aid – from the IFI’s as proof of the quality of those institutions. Or who would point to the tripling of students in high school in Africa, Latin America, “the doubling of caloric intake in India,” the reduction of 75% of infant mortality in Asia, the increase by 20 years life expectancy of the poorest one billion as proof of their good works. The truth is much good has happened. Life is better for billions. Some have advanced faster than others. But, we do not know why and we certainly do not know the impact of any one variable such as the impact specifically of the World Bank and IMF. There are scores of variables which have interacted. There were coups, wars, assassinations, earthquakes, revolutions and we cannot identify, even in retrospect, the impact of one particular set of institutions or activities in the global scene.
You see, if we knew how any one institution or variable had an effect and how, it could overwhelm all other factors, we could assign blame or credit. No such luck. If we could, we could predict. No such luck. One week before the crises in the U.K. and France in the mid-nineties, or the Mexican crises or collapse of the Russian ruble or the Asian crises, no one had a clue about what was to happen.
The lesson? It’s a complicated world out there. Be modest. Admit to vulnerability and uncertainty.