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 first reform Soros proposes is slightly complicated. Countries hold reserves, basically money in the bank against a rainy day. They typically hold these reserves in a safe, liquid form—US Treasury bills. Holding reserves is expensive for developing countries; today, they earn less than 2 percent on their Treasury bills, while there is a much higher return on investments in their own country. The difference between the return on US Treasury bills and the return on other investments is the price they have to pay to retain reserves sufficient to protect themselves against the high volatility of international markets. Interest rates may soar overnight, for reasons that have nothing to do with what is going on in their own country; the prices of imports, such as oil, may rise precipitously, while prices of what the country sells may plummet. Or the country may find that the market for its goods diminishes rapidly when a global recession sets in. Exchange rates may rise or fall by 50 percent or more, for reasons that are inexplicable, even by the so-called experts. Globalization has increased both the level of volatility and the exposure of developing countries to such risks. One of the costs they have had to pay is setting aside more money in low-interest reserves.


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.”

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

Much nonsense has been written (or more frequently spoken) recently concerning the effectiveness of economic aid. The secretary of the Treasury has suggested that he is not against giving aid; he only wants to be sure that the money is well spent, and he suggests that he has yet to see evidence of well-spent aid. If that is the case, he has failed to look for it. From my own experience in the World Bank and elsewhere, I have seen irrigation projects that allow poor farmers to double or triple their income by having two or three crops a year, when before they had only one. I have seen rural education projects bring literacy to the children of migrant workers, opening up the possibility that the children will break out of the vicious circle of poverty. I have seen health programs increase life spans and eradicate diseases like river blindness. Not every dollar is well spent, but that is true of every program in the public or private sector.

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

It is not surprising that some of Soros’s most penetrating insights concern the global financial system. He begins with a critique both of current global financial arrangements and of the policy advice provided by the IMF and the US Treasury. The problem, he rightly points out, is with their fundamentalist market ideology, a faith in free, unfettered markets that is supported by neither modern theory nor historical experience. It was easy in the midst of the East Asian crisis to blame the problems on the internal failures of such countries as Thailand and Indonesia—their lack of transparency and their crony capitalism. Those views have been far more muted following the failures and scandals of recent years, including the Enron debacle; the publicly orchestrated but privately financed bailout of Long Term Capital Management; and the revelations of the criminal use of secret offshore banking accounts. It was also instructive that Malaysia, which adopted capital controls, quickly returned to growth, with less of a legacy of debt; its recession was shorter and shallower than in those countries that followed the IMF’s advice.

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

The WTO meeting at Seattle in 2000 was intended to initiate a new round of trade negotiations which would bring down still further the barriers to trade throughout the world. However incoherently, the demonstrations there expressed discontent with the WTO’s conception of globalization; at least they brought some of the more urgent issues to public notice. The inequities of the current system, exacerbated in the previous round of world trade negotiations, still need to be corrected. For example, when goods from rich countries can flow without restriction to the poor countries, the poor countries may find it extremely difficult to build up their economies, because of the strong competition from imports. Meanwhile, the well-to-do countries that officially praise free trade frequently use tariffs and subsidies to limit imports from poor countries, depriving them of the trade they need to relieve poverty and pursue their own economic growth.

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 Values

Soros’s book is about economics, but, like the rest of us, he has been touched by the events of September 11, and these have led him to a broader set of reflections—on both politics and human nature. He points out that “we cannot protect” ourselves against the new threats “by increasing our military superiority over other states.”

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.

This Issue

May 23, 2002