Beijing, November 2005I - A few lessons from 13 years at the IMF
My three mandates in the IMF (1992-2000) have coincided with the time when globalization has accelerated its pace and became the dominant feature of the time.
What was taking place was -at its beginning- difficult to identify as the major phenomenon now well analyzed. The only evidence was that something was taking place which was very different from what the founding fathers of the Bretton Woods institutions in 1944-1945 had foreseen. Things were moving so rapidly nevertheless and affecting so deeply the international community that international institutions had to move, to adapt themselves and to suggest new orientations to the membership. Globalized finance was one of the features of the change going on, but not the only one by far.
One of the first things I had to perceive was that in this new world, problems became so complex and intertwined that no institution -and even the IMF, in spite of the high technicality of the problems it had to address- could remain strictly technical, trusting the markets automatism to solve the human problems of our world and in particular the “ultimate systemic threat facing humanity ”, poverty. As an unacceptable level of poverty was to my judgment also the ultimate market failure, we had to obey an ethical sense of solidarity to find the way to assist the countries in need.
A second lesson derived from the uneven success of our programs for stabilization, growth and reduction of poverty in developing countries; it became crystal clear that their effective implementation and lasting success was tightly linked to the quality of the participation of all segments of the population to their preparation, adoption and implementation. This new ethical dimension had then to be introduced in the strategies of the IMF, and indeed it was, at least each time governments accepted to go that far.
Then came the Mexican and Asian crisis -the true first crisis of the XXI century- as they were so different from the crisis of the first 40 years of existence of the IMF which were mainly external payment crisis, often exacerbated by unsustainable debt. The Mexican crisis and much more evidently the Asian crisis were unlike any seen before. Crises of this new type explode on the open capital markets, arise from complex dysfunctions, particularly in the financial markets, and are much less exclusively macroeconomic in nature. They quickly take on systemic proportions, and can be checked only through the immediate mobilization of massive financing. Take the three major Asian crises, for example: Thailand, Indonesia and Korea. Dealing with them meant dealing with a three-dimensional problem: a dimension, obviously, of macroeconomic imbalances, along with massive outflows of short-term capital; an acute crisis in the financial sector, reflecting institutional and banking practice weaknesses; and a much more fundamental crisis in the prevailing economic management model. I am thinking here of unhealthy – I would even say incestuous – relations among corporations, banks, and government. This third dimension of corruption, collusion, and nepotism was making obvious that un-ethical behaviors in such a great scale could have dramatic systemic consequences and implied that fundamental reforms were immediately required. The financial universe could no more think, at least from that very moment, that there is such a thing as sound economics and finance, without solid ethical behaviors of the main actors in the public and private sectors.
But there is more. We had soon to acknowledge that -important as they may be- there is not such a thing as financial ethics in isolation. At the moment we were discovering the importance of ethics for finance, we were de facto invited to turn our attention to global ethics for the sustainability of a world were finances were leading the globalization.
Taken together these four lessons have contributed to the progressive emergence of a new paradigm of development. Let me emphasize two of its key features.
First, a progressive humanization of basic economic concepts. It is now recognized that the market can have major failures, that growth alone is not enough and can even be destructive of the natural environment or precious social goods and cultural values. Only the pursuit of high-quality growth is worth the effort. What is such growth?
• growth that can be sustained over time without causing domestic and external financial imbalance;
• growth that has the human person at its center, that is accompanied by adequate investment, particularly in education and health, to take full advantage of the tremendous leverage of human capital for future growth;
• growth that, to be sustainable, is based on a continuous effort for more equity, poverty and inequalities reduction, and empowerment of poor people; and
• growth that promotes protection of the environment, and respect for national cultural values.
Second, at a deeper level, we observe in recent approaches a striking and promising recognition of a convergence between a respect for fundamental ethical values and the search for efficiency required by market competition. Yes, you can see now a far wider recognition:
• that participatory democracy – that major conquest of the 20th century – can maximize the effectiveness of sound economies;
• that transparency, openness, and accountability are basic requirements for economic success;
• that combating collusion, corruption, and nepotism must be a major concern for the international financial institutions;
• that systematically dismantling the state is not the way to respond to the problems of modern economies; rather we must aim for a slimmer yet more effective state, able to provide the private sector with a solid framework in which the rule of law could prevail, on a level playing field; and
• that there is a mutually reinforcing relationship between macroeconomic stability and structural reform on one hand, and growth and the reduction of poverty and inequality on the other.
Stability and strong institutions are clearly essential for growth, and hence for poverty alleviation. But the converse is also true: popular support for stabilization and reform cannot be counted upon, unless the whole population, including the poorest—and by the poorest I mean those that not only are out of the loop, but even more are unable to contribute their experience—is able to participate in the formulation of the policies and, of course, in the benefits from those policies.
In short, a new economic paradigm is emerging. The new opportunities for growth created by the revolution in information technology and the opening of markets, combined with more resolute efforts to promote opportunities for all to share in the benefits of growth, will amplify the positive effects of macroeconomic and monetary stability. All of this together can transform globalization in a great opportunity for humanity provided that the emerging new paradigm is firmly rooted in fundamental human values and ethics, and here is where the contribution of the Chinese world will be essential.