The world of international finance and economics is astonishing. What would seem to be basic, and even obvious, principles often seem contradicted. One might have thought that money would flow from rich countries to the poor countries; but year after year, exactly the opposite occurs. One might have thought that the rich countries, being far more capable of bearing the risks of volatility in interest rates and exchange rates, would largely bear those risks when they lend money to the poor nations. Yet the poor are left to bear the burdens. Of course, no one expected that the world market economy would be fair; but at least we were taught that it was efficient. Yet these and other tendencies suggest that it is neither.
George Soros has written a brilliant, powerful book, On Globalization, which goes beyond just describing the failures of the current international arrangements. He proposes concrete, practical reforms. Soros, having made his fortune on the international capital markets, should know something about them. But what makes this book so impressive is that he combines these insights with a humanity that comes through in every subject he touches on.
What makes some of his proposals so convincing, especially those concerning foreign assistance, is that he has acted on them. He has been as successful as a social entrepreneur as he has been as a financier. He has put his money where his mouth is, so to speak, and his network of Open Society foundations has had enormous influence, especially in Eastern Europe, first in supporting dissidents and then in setting up post-Communist institutions such as the Central European University in Budapest. His overall program has been far more successful—and far more influential—than those of most governments, including that of the US.
In his earlier work, Soros laid out his conception of an open society, which he sums up here as follows:
Open society is based on the recognition that we act on the basis of imperfect understanding. Perfection is beyond our reach; we must content ourselves with an imperfect society that holds itself open to improvement. The acceptance of imperfection coupled with a constant search for improvement and a willingness to submit to critical examination are the guiding principles of an open society.
How different from the arrogance, the overbearing self-confidence that characterize so much of the discussions of economic policy, especially at the International Monetary Fund, one of the powerful institutions to which he devotes an entire chapter. As he approaches each issue, he does so carefully, dispassionately, calmly. And in many ways, that is what sets this work apart from so many others on globalization. As he describes the inequities and injustices of international economic arrangements, he never lets himself be carried away. The stories speak for themselves. Through quiet understatement, the reader is left convinced that something should and can be done.
Seeking to explain what is wrong with globalization, and in particular with the international economic institutions, Soros, consistent with his non-utopian approach, looks in this new book for practical proposals, reforms that might reasonably be adopted. To be sure, he recognizes that there are forces that will work against these changes, that special interests in the United States benefit from the current arrangements. But he is a great believer in global civil society, and one of its strongest supporters. Global civil society has, at times, been able to overcome these established forces. In 2000 the Jubilee Movement, an international coalition of economic activists, called for, and succeeded in obtaining, debt relief for more than twenty of the poorest countries of the world.
Previously, the IMF had imposed such high hurdles for poor countries to qualify for relief from debt that few could meet the standards it set. Anyone who has watched the change in attitudes, both inside the institutions and in the general public, over the past five years must recognize the power of global civil society. It is now a commonplace that the international trade agreements about which the United States spoke so proudly only a few years ago were grossly unfair to countries in the third world. As I go to meetings of businessmen, whether in the rarefied seminars of Davos or the financial circles of New York or the high-tech world of Silicon Valley, practically all the people I see recognize the inequities and hypocrisies of American government policies. They are, however, more critical of the abuses of others’ special private interests, whether they involve steel, textiles, or agriculture; when it comes to their own interests they often claim that special treatment is either deserved or necessary.
Soros is one of the growing band of experts who, while recognizing the power of globalization to increase wealth, also recognize its adverse effects. His indictment is simple: globalization has hurt many people, especially the poor in the developing world. Globalization has distorted the allocation of resources in favor of private goods at the expense of public goods. And global financial markets are prone to crisis. No one who has looked dispassionately at the process of globalization over recent years could disagree with any of the elements of this indictment.
The inequities associated with globalization have long been evident to those concerned about global social justice. And, at least since the global financial crisis of 1997–1998, the instabilities of globalization have been a source of much anxiety. But the events of September 11 have added a new dimension to the globalization debate. It is not just goods and services that move easily across borders. Secret offshore bank accounts are used for a variety of illegitimate transfers and deserve special scrutiny. They are responsible for part of the lack of transparency that may have contributed to the Asian crisis but served the purpose of important financial interests well. They are used to launder money for the drug trade; they also provide a mechanism for corrupt officials to move money out of their countries, and enable the rich to avoid taxation, and, as we’ve recently been made aware, they also help provide the financing for terrorism.
Before September 11, the US Treasury vetoed the efforts of the OECD to limit the secrecy protecting such accounts—evidently it served Wall Street’s interests too well, regardless of the costs imposed on others in the global system. After September 11, even the US Treasury had to change its position. Moreover, while the links between poverty and terrorism are complicated, few would deny that poverty, and especially high unemployment rates among young men, provide fertile ground on which terrorism can grow. Ensuring that globalization will be more helpful to the poor thus becomes not just a moral imperative but also something that should be viewed as a matter of self-interest.
Soros’s book is written with a simplicity that makes it an excellent introduction to the international economic organizations, including the IMF, the WTO, and the World Bank. While these institutions are often blurred in the minds of the public, they are distinct institutions, with different missions, cultures, and governing authorities. All of them take an important part in the unfolding drama of globalization, and they accordingly bear much of the blame for its failures. As Soros says, “They are being operated for the benefit of the rich countries that are in control, often to the detriment of the poor ones….”
In its failures as an institution, clearly the IMF is the worst of the organizations. As Soros puts it, “Since the 1997– 1999 crisis,…the emperor has no clothes: IMF programs fail to impress the markets.” And he should know. Like most economists, he sees the policies that the IMF advocated before that crisis as having helped to cause it by going too far in insisting on the liberalization of capital markets, i.e., in encouraging countries to accept long-term and short-term loans without effective controls on their possibly damaging effects (for example when capital is suddenly withdrawn by a foreign creditor). With his usual understatement, Soros points out that “the IMF was even proposing to include the opening of capital markets among its core objectives at the time the Asian crisis erupted. Not much has been heard of that proposal since that time.”
Some, seeing the failures of the international economic institutions, have advocated that they be abolished. But Soros, in the practical spirit of the open society, recognizes that in the new world of globalization, there is even greater need for countries to act collectively through international institutions. Globalization entails more interdependence, and interdependence requires cooperation. Soros makes a convincing case for the need for larger expenditures on global public goods, including health and economic development. Just at the time when we have urgent need for international economic institutions such as the IMF and the World Bank, confidence in these institutions is at its lowest. The solution is not to abolish them, but to reform them, and much of Soros’s book is devoted to proposing specific reforms, among them an innovative source of finance and an innovative approach to foreign aid. Both seem to me very important.
The SDR Proposal
The United States has been one of the strongest proponents both of globalization and of such policies as the liberalization of capital markets, which make countries particularly vulnerable to the risks I have mentioned. At the same time the US has benefited from the increased demand for dollar reserves, while the developing countries have paid a heavy price to obtain them.
Moreover, there is a built-in deflationary bias in these international arrangements, since every year billions of dollars of income are not spent, but simply held in liquid reserves. In addition, the system has a built-in instability. The IMF (and others) constantly warns developing countries against trade deficits. But the sum of the world’s trade deficits must equal the sum of the surpluses; so if a few big countries, like Japan and China, insist on having a surplus, the rest of the world must have a deficit. If some country reduces its deficit (as Korea did after the 1997 crisis), the deficit simply must show up somewhere else in the system. And as a country finds itself with a large deficit, it may face a crisis. If investors sell its currency, its central bank may be forced to push up interest rates in order to keep the currency from falling precipitously. The high interest rates may slow the country’s growth and cause a recession.
The only thing that keeps the system working at all is that the United States, the richest country in the world, has become the “deficit of last resort.” This is the ultimate irony: the financial system allows the United States to live year after year beyond its means, buying abroad far more goods than it sells, even as the US Treasury, year after year, lectures others on why they should not do so. And the total value of the benefits that the US gets out of the current system exceeds, by a considerable amount, the total foreign aid the US gives. What a peculiar world, in which the poor countries are in effect subsidizing the richest country, which happens, at the same time, to be among the stingiest in giving assistance in the world. As Soros points out, “Foreign aid amounts to a measly 0.1 percent of the GDP of the United States, compared to almost 3 percent at the time of the Marshall Plan.”