There is an alternative arrangement—one that is already partially in place. The international community can issue a special kind of reserve money, called “Special Drawing Rights,” SDRs for short, although one could give such money another name, such as global greenbacks or TERRAs. Countries simply put the currency in their vaults. What makes this valuable is that other countries will trade their currencies in exchange for these SDRs; of course, countries will not draw upon their reserves except in times of need. It’s like a cooperative, in which each member of the cooperative has the right to call on other countries by an amount equal to these reserves.
Issuing a modest amount of these SDRs would not be inflationary; but it would provide funds to support global public goods such as health care and education and help finance development. In keeping with Soros’s emphasis on modest, practical reforms, he proposes to make use of the SDRs whose issue has already been authorized by the IMF—it simply awaits the ratification of the US. He proposes that the developed countries agree to contribute their SDR allocation to the provision of global public goods, including development.
This important, simple, and practical proposal has received a sympathetic hearing from many governments and financial institutions around the world. Soros has actively promoted it, and I have participated in discussions concerning it with several governments. My only criticism is that it does not go far enough—perhaps I am too much of a utopian. To achieve the even modest goals that the international community has agreed upon, such as reducing poverty and illiteracy by half by 2015, will require $50 billion a year more than is now being spent. Soros’s proposal would provide, on a one-time basis, $27 billion. The inequities and instabilities associated with the current reserve system that I have described will continue, and a one-time allocation would not address these more fundamental problems.
I believe that there are practical ways by which the United States, or others who might otherwise be reluctant to participate, can be persuaded to do so. For instance, if those who participate in the scheme agreed that they will only hold reserves in currencies of other participants, it would put enormous pressure on the United States—along with the other countries whose currencies are used as reserves—to join.
Reform of Foreign Assistance
George Soros suggests his own set of reforms for increasing the effectiveness of foreign aid. He approaches the problem from an entrepreneurial perspective, and with what seems to me acute understanding:
For a foreign aid “market” to be successful, it is important to realize that it is bound to be less efficient than a normal market…. There is no single criterion of success similar to the bottom line in business. There are some objectives that can be measured by quantitative indicators such as mortality or literacy, but it would be limiting and distorting to confine the objectives to those that have quantitative indicators. [Italics added.]
His proposals combine the use of trust funds partly administered by the UN Development Program; the engagement of the best available expertise; and reliance on nongovernmental organizations. He rightly points out that much of today’s international assistance is hampered by the requirement that it pass through governments, whose agendas and interests do not always coincide with helping the poor of the world. (Nor do the agendas and the interests of some of the international economic institutions formed by governments.) Soros’s Open Society foundations have shown that there is hope for effective aid projects even in countries with nondemocratic governments.
The Global Financial System
Soros explains that the case for free movements of capital is far less clear than that for free trade. He could have gone further: the evidence is that liberalizing capital markets does lead to increased risk but does not lead to increased economic growth. Soros explains something that most observers of the recent stock market bubble know intuitively, but that market fundamentalists deny: “Financial markets, left to their own devices, are liable to go to extremes and eventually break down.” Robert Shiller, in his book Irrational Exuberance, has documented this tendency of markets to excess volatility.* * The history of capitalism, Soros writes, is “punctuated by crises.” As he points out, the problem is not new. What was exceptional about East Asia, as I have written, is not that it eventually had a crisis, but that it went so long without any serious economic downturn. Soros also points out that it is the developing countries on the “periphery” of the system that suffer the most. And herein, he writes, lies the problem for reform. Those who believe in market fundamentalism “are reluctant to accept that the system may be fundamentally flawed when it is working so well for those who are in charge.”
Soros’s criticisms of many of the proposed reforms of the IMF are devastating. He is convincing when he writes that the fundamental problem with IMF policy was not, as some maintained, simply that of “moral hazard”—the fact that the IMF’s bailouts induced lenders to exercise insufficient due diligence in making loans. Nor was it surprising that the IMF’s ill-conceived “bail-in” strategy—forcing the private sector to participate in the bailouts—was, by and large, a failure; it has since been abandoned. To be sure, the IMF only tried the strategy on weak countries like Romania and Ecuador, not on Russia.
As confidence in the IMF eroded owing to such failures, it tried what seemed a bold political strategy—its first deputy managing director argued that it should have its power enhanced by making it into a lender of last resort, i.e., in case countries default or are about to default on their obligations. As Soros puts it simply and forcefully, “The IMF cannot act as lender of last resort because it does not exercise control over domestic banking systems. Acting in that capacity would mean signing a blank check.” There are further fallacies in the claims that the IMF should be a lender of last resort but Soros’s basic argument is sufficient; why belabor the point when a simple, devastating observation is enough to discredit the proposal?
In some cases, Soros hardly needs to make an argument: events themselves tell the story. After the East Asia crisis, the so-called wisdom of the IMF and the US Treasury was the “two-corner theory”—countries should either have perfectly fixed or perfectly flexible exchange rates. It was that mistaken belief that partly contributed to the Argentinian debacle by providing support to those who wanted to maintain an exchange rate system that was doomed to failure. Argentina’s attempt to maintain a rate rigidly fixed to the dollar failed, leading to a flight of capital from that country. But those less wedded to the market fundamentalist ideology always recognized that this two-corner notion was silly, supported by neither theory nor evidence—which is why the Eminent Persons Group of world economic leaders supported by the Ford Foundation rejected the IMF position (and incidentally agreed with many of the other views put forward by Soros).
The market fundamentalists, who believe that unfettered markets always and everywhere will, on their own, without government intervention, lead to efficient and socially desirable outcomes, argue that what went wrong with markets was “too much government” in the form of bailouts. Left to themselves, markets by themselves would somehow have worked just fine. Here Soros seems to me persuasive: “The system does need to be changed, but it is not enough to eliminate the moral hazard.” Something, he writes, must be done “to counterbalance the inherent disadvantages” of nations on the periphery “and create a more level playing field.”
I strongly agree with the spirit of two of his proposals—the more advanced industrial countries should absorb more risk (including through the international financial institutions) and better arrangements should be made to deal with international bankruptcy, including “standstills,” i.e., moratoriums on debt repayment. I, and others, have long argued for the latter, and Soros rightly points out that outcomes in East Asia would have been far better if greater use had been made of such mechanisms, rather than the big bailouts by which large amounts of money are made available to repay debt and sustain an overvalued exchange rate. With Argentina again having demonstrated the failure of the big bailout strategy, the IMF has been looking elsewhere for solutions, and its recent initiative concerning standstills and bankruptcy deserves serious attention. But unfortunately, the US Treasury seems to have nixed what appeared to be a genuine inquiry into meaningful reform.
Soros rightly notes the marked slowdown of flows of funds to the emerging markets after the 1998 crisis. “Taking resident lending, portfolio investment, and private credit flows together, there has actually been a net outflow from emerging markets since 1997, going from positive $81.7 billion in 1996 to a negative $106 billion in 2000, offset by slightly larger inflows of foreign direct investment and by official financing.” This is an odd situation, and for anyone who believes that the key problem of development is lack of finance, it is deeply troubling. Soros’s proposals are, in part, designed to facilitate the resumption of the flow of credit.
I think, however, that the case that financial flows (as opposed to foreign direct investment) have had, on balance, a strong positive effect on growth is less than clear. Foreign direct investment—at least in some sectors and when appropriately conceived—does create jobs, generate access to markets, and bring with it new technology. Foreign “investment” in short-term credits is risky for a developing country since outsiders can change their minds overnight. Markets may provide discipline, but they are fickle and erratic disciplinarians, overlooking important sins at some times, and at other times punishing countries for sins of others. Certainly, as I have already noted, the evidence from countries that have subjected themselves to the “discipline” of short-term capital flows is hardly encouraging.
International Trade and the World Trade Organization
There is now nearly universal agreement that such inequities should be addressed; and the round of negotiations that was initiated in November 2001 at Doha, in Qatar (far from the protesters who showed up in Seattle or in Genoa), was called the “development round.” That it took so much pressure and persuasion for the advanced countries to agree even to discuss some of these basic issues suggests how difficult it will be to resolve them.
Soros does not provide a comprehensive treatment of the controversy over free trade, but what he says should be read by everyone interested in globalization. For instance, he sharply criticizes the “Trade-Related Investment Measures,” or TRIMs, that were said to be one of the “achievements” of the Uruguay round of negotiations completed in 1994. These measures were designed to prevent discrimination against transnational corporations by developing nations; in some cases, for example, corporations were required to procure a certain amount of their capital goods locally. TRIMs were intended to relieve them of such obligations. Such measures, Soros writes, were
designed to provide a level playing field between foreign and domestic enterprises. On the face of it, this is a worthy objective. But the fact is that in a world in which capital is free to move about, the playing field is heavily tilted in favor of international investors and multinational corporations. The [new measures] institutionalize and reinforce the bias.
Soros sides, too, with international experts like Jagdish Bhagwati in questioning the foray by the WTO into the protection of intellectual property rights. He writes:
There is a need for patent and copyright protection, but such protection does constitute a restraint of trade. How much restraint is justified? The calculus is quite different for technologically advanced countries that profit from innovations and less-developed countries that have to pay for them. Intellectual property rights were high on the US agenda, and less-developed countries have reason to be resentful about the shape that TRIPs [Trade-Related Intellectual Property Rights] took.
When I was on the Council of Economic Advisers in the Clinton administration, we (as well as the Office of Science and Technology Policy) worried that the US trade representative, who negotiates these agreements “on behalf” of the US, was pushing for intellectual property arrangements that could have harmful effects. The US was reflecting the interests of the drug companies more than the perspectives, for instance, of scholars or those concerned that the laws governing intellectual property should maximize growth. The US trade representative paid scant attention to our concerns—let alone those of the developing world. As Soros puts it, “The WTO opened up a Pandora’s box when it became involved in intellectual property rights. If intellectual property rights are a fit subject for the WTO, why not labor rights, or human rights?”
As with finance and development assistance, Soros repeatedly acknowledges the importance of the international institutions: “The WTO [is] a very valuable institution. If it didn’t exist, it would have to be invented.” But he does not shy away from either criticizing it or promoting reforms. And while many will feel that here he has not gone as far as he should, he has put together a “minimalist” agenda around which those who want to see the global system work—and work for the poor—can rally.
Global leadership requires not only being against something; it requires being for something. We have an alliance against terrorism. We should also have an alliance for more global justice and a better global environment. Globalization has made us more interdependent, and this interdependence makes it necessary to undertake global collective action. The United States must take the lead to provide global public goods—including law and order. It should be working to bring about reforms in the world economic order, away from the “Washington consensus”—the ideologically driven “model” of market fundamentalism. But as Soros also points out, for the US to be a leader will require some deep changes:
We must abandon the unthinking pursuit of narrow self-interest and give some thought to the future of humanity…. [We need] a reassertion of morality amid our amoral preoccupations. It would be naive to expect a change in human nature, but humans are capable of transcending the pursuit of narrow self-interest. Indeed, they cannot live without some sense of morality. It is market fundamentalism, which holds that the social good is best served by allowing people to pursue their self-interest without any thought for the so-cial good—the two being identical—that is a perversion of human nature.
In the same vein, Soros concludes by emphasizing a theme that runs throughout his book—that compassion is also a matter of pragmatic realism:
The fight against terrorism cannot succeed unless we can also pro-ject the vision of a better world. The United States must lead the fight against poverty, ignorance, and repression with the same urgency, determination, and commitment of resources as the war on terrorism.
Princeton University Press, 2000.↩
Princeton University Press, 2000.↩