by Robert Rubin
Many of those who care deeply about global poverty have expressed great skepticism about globalization and open markets. I believe that what is sometimes framed as a divide between those who care about poverty and supporters of globalization is a false debate. President Clinton’s comment that a strong economy is the best social program also applies to developing countries, where rapid economic growth is critical to raising living standards and lifting people out of poverty. Globalization and market-based economics are central to growth and have contributed greatly to huge increases in living standards for many nations and vast numbers of people.
But as President Clinton also used to say, growth and markets on their own are not enough. Government also needs to put in place policies to promote the broad-based sharing of growth, and to address many important needs that markets by themselves will not deal with adequately. And those measures will, in turn, increase growth by improving the productivity of the workforce. The same is true in the global arena, where poverty and inequality and their attendant social ills remain huge problems—and powerful impediments to productivity and growth. In poor countries, some of the most basic prerequisites for a functioning market economy, such as the rule of law and effective and noncorrupt governments, as well as adequate education, health care, and the like, are too often lacking.
Every time I’ve visited a developing country, I’ve come away with a renewed appreciation of how difficult the problems in such countries can be. Mexico, for instance, had a succession of Presidents and finance ministers, starting in the mid-1980s, who implemented broad-based reform. Largely because of intelligent policy choices, many economic fundamentals in Mexico are sound and the country’s prospects are good. Nevertheless, growth rates have been modest. Too much of the population still has little access to reasonable health care and adequate public education, and public resources to address these problems are insufficient. Beyond that, Mexico faces the challenges of establishing the clear rule of law needed for an effective market-based system, including fighting corruption more effectively. It also needs to encourage a higher savings rate. All of these changes are difficult, not only substantively, but politically.
It was in the context of thinking about inner cities and poverty here in the United States that I first came to focus on the idea of a “parallel agenda.” What this means is that market-based economics and integration with the wider economy, the fundamental policies for growth, should be allied with a “parallel” set of policies to help fulfill the needs that markets will not adequately meet, such as a reasonable social safety net and retraining programs for those workers dislocated by change. Later, as a result of the Mexican and Asian crises, I focused on these issues as they relate to emerging markets. Effective implementation of a parallel agenda in developing nations would promote a broader sharing of the benefits of globalization, which in turn would increase productivity and so advance growth as well as enhance political support for globalization in the developing world.
Despite the gains in living standards of recent decades, the World Bank and most experts estimate that roughly half the world’s population still lives on less than $2 a day, and 20 percent lives on less than $1 a day. Some analysts contend that these numbers overstate the problem, perhaps by as much as half. But even using the more conservative estimates, an enormous and unacceptable number of people are still living in poverty, often without adequate access to clean water, basic health services, and so on—and the greatest benefits of globalization and growth have too often accrued to relatively few. However much progress there has been, it clearly has not been nearly enough.
For many years, it seemed to me that the well-off in developing countries too often viewed these terrible disparities as acceptable. But on trips to a number of developing countries in more recent years, I’ve noted a growing and by now substantial recognition on the part of many business people that they’re not going to have the kinds of economies or societies they want unless they become more effective at dealing with poverty.
There remain enormous uncertainties about how best to come to grips with these problems. In the fall of 2002, some members of my old Treasury team—Larry Summers, David Lipton, Tim Geithner, and Caroline Atkinson—got together at Larry’s house in Cambridge to discuss some of these issues in relation to this book. During a spirited four-hour discussion, it was striking that even as well-versed as all of these people were on the subject, their views sometimes conflicted and they recognized large areas of uncertainty. Most serious-minded experts acknowledge that there’s simply a great deal they don’t yet know about poverty and growth in the developing world. We all agreed that certain factors—such as global integration and market-based economics, at least reasonably effective government, some level of social cohesion, a decent and broad-based education system, basic health care, sound fiscal policy, and a high savings rate—tend to figure prominently in rapid economic progress. What is much less certain is how to encourage countries to pursue the kinds of policies and conditions most strongly correlated with success.
It is also unclear why apparently similar reforms have produced such widely varying results across different countries. And perhaps the most challenging questions involve how to address the needs of the millions of poor people who live in countries with governments that, due to corruption or ineffectiveness, are unlikely to deliver reform. While emerging- market countries—and, for that matter, developed nations—all have less than perfectly effective government and at least some corruption, government that is fundamentally ineffective seems to preclude successful development.
BUT WHY DO MANY COUNTRIES that seem to choose sound policies not enjoy the same kind of progress as others? The “success stories” do seem to offer some guidance. One lesson that seems clear is that despite the problems associated with global integration, no economy has managed to grow in a sustained fashion without pursuing integration with the rest of the world, at the very least by promoting exports. In addition, increasing reliance on market forces has been central to improving economic performance. Even in Africa, where economic conditions have been so difficult for the most part, some countries that have embraced market reforms—such as Uganda and Mozambique—have achieved impressive levels of growth and significant improvements in health care and other social indicators.
In Asia, standards of living have grown steadily and in some cases dramatically over the past three or four decades, improving the lives of hundreds of millions of people. South Korea stands as a particularly vivid example: between 1960 and 2000, the country went from around $100 in per capita annual income to around $10,000, due in great measure to some degree of market-based economics, limited liberalization, and a strong export orientation. There were many other factors in the “Asian miracle” beyond freer trade and the integration of global markets. But the kind of growth that countries such as South Korea, Thailand, Malaysia, and Singapore have experienced simply wouldn’t have been possible without elements of globalization.
A counterpoint to this is Latin America, which has had generally disappointing results, growing at relatively slow rates. Even during the reform era of the late 1980s and the 1990s, when most Latin American countries liberalized trade, promoted exports, and relied increasingly on private markets, these nations continued to have low growth rates—with the notable exception of Chile. As Larry said at our Cambridge meeting, Latin America remains something of an enigma for advocates of our approach. Our understanding of the difference between Asian and Latin American growth needs to be vastly improved in order to provide better judgments about development strategies and policies going forward.
Some have suggested cultural explanations for Asia’s relative prosperity. Although this interpretation is in some ways hard to apply to a region that has such heterogeneous cultures, the strongest Asian economies generally have in common such traits as a strong work ethic, a dedication to education, and high savings rates. The success stories in Asia also tend to have less skewed wealth, land,
and income distribution than much of Latin America, and many have implemented growth- and productivity-oriented policies and reasonably sound fiscal management over a long period of time. In addition, the foreign minister of one of Latin America’s largest countries once told me that he thought that the difference between these two regions lay largely in the effectiveness of governmental structures and processes in Asia as compared to Latin America, and the comparative political inability in Latin America—despite great strides in recent years—to do enough of what was needed and at the same time maintain sound fiscal conditions.
China is sometimes offered as an example of a thriving closed economic system. In fact, it is the opposite. China’s economic boom began when Deng Xiaoping began moving the country toward exports and market incentives, albeit in the context of state-owned enterprises and a carefully controlled opening to capital flows. This mind-set has taken hold to a remarkable degree—though much still remains to be done to convert China to a true market economy. Every time I’ve visited with people running banks and industrial companies in China, I’ve found that they sound much like their American counterparts when they talk about their businesses—discussing prices, competition, growth, and economic issues. Our view at Treasury was that China could do even better if it opened its markets more quickly to imports as well as promoting exports. And while China did not do that, as it pursued a policy of export-led growth it also slowly opened its own markets to both imports and capital flows, and then took the dramatic step of joining the WTO. India, which is also in the process of transforming itself from a state-dominated to a market-based economy, albeit at a slower rate than China, also grew rapidly during the 1990s.
Sub-Saharan Africa doesn’t fit into any neat category. The problems in most of these countries are momentous. But my trip to Africa as Treasury Secretary left me with the impression that there were also great opportunities. For example, the Finance Minister of Mozambique, where strong economic policies have led to high growth from a low base, explained to me how much could be done with even small amounts of capital. To move forward, Africa needs to develop more effective governments and stronger institutions. The industrial world also needs to focus much more of its attention—and provide adequate resources—to deal with Africa’s special problems.
ADDRESSING GLOBAL POVERTY and the dislocations sometimes caused by globalization is an immense moral issue, but is also enormously in America’s national self-interest. Unfortunately, the importance of this endeavor is not reflected in American politics. The American public does not understand the stakes involved, nor do people generally appreciate how little we currently spend relative to the magnitude of the problem.
While at Treasury I was deeply involved in seeking the annual congressional appropriations for certain programs of the World Bank, which uses those contributions from the industrialized countries to fund a wide variety of programs to combat poverty and improve living conditions in the developing countries. This was always an uphill struggle in Congress. After leaving government, I had the opportunity to revisit these issues in a systematic fashion in the context of a United Nations commission on foreign assistance on which I served in 2001. The commission, chaired by former Mexican President Ernesto Zedillo and including representatives from the developed and developing worlds, was intended to draw attention to these issues in connection with a conference held in March 2002 in Monterrey, Mexico, to support increased financial assistance for developing countries.
The Zedillo commission advocated the same basic approach of integrating with the global economy, market-based economics, “parallel agenda” policies to deal with needs markets won’t fulfill, and effective government. But it also focused heavily on what the industrial nations can do to support developing-country growth, the large shortfalls in these areas, and the difficult politics around these issues in the industrialized countries.
The developing countries are heavily dependent on industrial countries’ markets for exports, and those markets are dependent on industrial countries’ growth. Both Japan and, to a lesser extent, Europe have had relatively weak economic performance in recent years, in large measure because structural rigidities—in labor laws, social safety nets, regulation, and so on—have deterred investment and private-sector growth. The United States grew strongly in the 1990s but is now positioning itself for long-term fiscal deficits that could undermine that growth over the longer term. And as we urged Japan in connection with the Asian financial crisis, the industrial countries should feel a responsibility for sound growth policies, not only for their own people, but for the rest of the world.
In addition to managing our own economic policies so as to contribute to strong global growth and better markets for developing countries, there are two primary ways in which the industrial countries can support developing-country growth: trade and aid. Trade—improving access for developing countries’ goods to our markets—is almost certainly the single most important measure industrial nations could take to help developing ones. President Zedillo made this point in our commission discussions as he expressed, in his understated way, enormous frustration with how advanced countries such as ours advocate free trade while impeding imports from the poorest countries. Virtually all developing countries have a strong comparative advantage in cheaper low-skilled labor. In many of the poorest countries, the most important export industries are agricultural products and textiles, which are produced by labor-intensive means. But agriculture and textiles are among the most politically powerful and economically protected sectors in developed countries, and developing nations often find themselves very limited in their access to export markets in Europe, Japan, and the United States. Barriers to trade can be direct—such as tariffs or trade restrictions—or indirect, through subsidies to goods produced in the industrialized world that make it harder for imports to compete. Lowering such import barriers—primarily on textiles and agricultural products, but also on steel, an important product to some emerging markets—would be of enormous benefit to the developing world, especially the poorest countries.
I remember the negotiations around an African trade bill that the Clinton administration supported. We wanted to remove textile duties but were opposed by unions and some manufacturers in this country. Because of their influence, the best compromise we could negotiate was reducing tariffs on African textiles that were made from fiber originating in the United States. The bill that passed has already produced significant gains for the products and nations that were included and is projected to raise the level of nonoil exports from Africa by roughly 10 percent. But the benefit would have been nearly five times greater without adding restrictive conditions on the terms of market access, according to an IMF estimate. And the bill did not apply to developing countries outside Africa, such as Bangladesh, which has more than one million women working in the textile industry and could increase export revenues from such products by an estimated 45 percent, if granted this kind of duty-free access to markets in industrialized countries such as the United States and Japan.
Trade barriers are estimated to cost the developing world at least $100 billion of lost opportunity a year, or by some estimates much more, a multiple of foreign aid spending by all governments. For example, one study estimates that if Africa’s share of world exports increased by 1 percent, its trade revenues could grow by $70 billion a year—five times what it receives in aid and debt relief. The New York Times ran a series of valuable editorials on this issue, pointing out that subsidies to the major cotton farmers in the United States were a critical factor in keeping the two million cotton farmers of the small African nation of Burkina Faso from competing on a level playing field in the global marketplace. The United States took a step backward by passing a ten-year, $180 billion agricultural subsidy bill in 2002, which increased the subsidies that American farmers receive by almost 80 percent. The United States also moved its trade policy in the wrong direction in 2002 when we increased restrictions on steel imports. These
measures were damaging to the developing world and make it harder for us to argue for more open trade in the international arena.
In political terms, protecting industries is usually appealing, because the negative consequences of free trade are so visible while the benefits—though much greater—are diffuse. In a discussion with President Clinton about a Japanese trade agreement, I mentioned that one sector where we needed to push for reduced trade barriers was fish. Clinton remembered being in Japan and seeing some poor fishermen casting their lines off the rocks. He said quite determinedly that he wasn’t going to do anything to hurt those vulnerable people. “But Mr. President,” I said, “to help those poor fishermen, you’re going to prevent the vastly greater benefit that would come to the poor throughout Japan from being able to buy cheaper fish.” The damage of trade liberalization to the fisherman was the most palpable. But the preponderant effect would be to benefit a much larger number of other, invisible poor and consumers more generally.
Developing countries benefit from trade and openness, but so do industrialized countries such as our own. Trade and economic ties are sometimes discussed in terms of winners and losers. But while nations are in some sense economic “competitors,” in a more important sense trade is a mutually beneficial dynamic. Success in one country can raise living standards in another, rather than coming at the other’s expense. The United States is already a huge market for the rest of the world and our growth creates opportunities elsewhere. Conversely, growth in Europe and Japan, and successful development in emerging economies, provides better markets for us.