Download No guarantees, real risks

*Mag Summer 00 (152)
28/2/05
11:25 am
Page 12
No guarantees, real risks
TELEGRAPH COLOUR LIBRARY
LSE alumnus Robert E Rubin, former United States
secretary of the Treasury from 1995 to 1999, gave a
public lecture at the School in February, his topic
Global economy: opportunities and risks.
No guarantees,
real risks
spent a wonderful year at LSE
long ago, in a category officially labelled as ‘ostensible student’. That always struck me
as a curious label, but it certainly caught the character of
my year at LSE. My understanding and views were
affected by the internationalism and the different ways of thinking
that I encountered at LSE and in
London more generally. However, those
days of carefree living are long over.
This evening I would like to discuss a
very serious set of issues that reflect my
experience of more recent years.
This great institution was founded over
a century ago, when the Industrial
Revolution was transforming society –
and the people of that time were trying to
manage enormous economic changes.
Today we are trying to manage our way
through another such period of transformation, with new technologies ranging
I
12 I LSE Magazine I Summer 2000
I
from advanced computers and the internet to human genome projects, globalisation along many fronts, and the spread
of market-based economics to most
countries around the globe. LSE was
immersed in these debates during the
20th century and is exceedingly wellpositioned to provide the same fertile
leadership for the equally great challenges of the new century.
Against this backdrop, I would like to
share some of my conclusions about
the economic future. My comments
may seem a bit dour. Perhaps that is
the way former secretaries of the
Treasury sound, or maybe I’ve just seen
too much over too many years.
Actually, I’m something of an optimist,
on balance. On balance. That is precisely the point – to recognise both
opportunities and risks.
While I do believe that the powerful
forces of change just mentioned offer
great opportunity for the global econo-
my in the new century, I also believe
there are serious and continuing risks
that require clear thinking and action. I
will discuss four of these risks: the currently fashionable but counter-productive view that a new economic paradigm will ensure endless and
uninterrupted prosperity; the threat to
ongoing trade liberalisation and openness to change more generally; the
persistence of widespread and vast
economic inequality; and the continuation of the underlying conditions related to recent financial disruptions.
To start, there is a paradox that
accompanies our prosperity. Our very
success seems to diminish our willingness to exercise the discipline and take
the actions necessary to prolong that
prosperity, among investors, those running businesses, and the public sector.
In many ways, our greatest enemy today
is the complacency of good times. That
complacency is heightened because in
the face of the recent crises, the system
has worked. In 1987, the United States
stock market fell by 22 per cent in one
day but recovered quickly and there was
no adverse economic impact. In 19971998, for tens of millions of people in
Asia, and elsewhere, the financial crisis
was a devastating event. But a year and
a half later, most western countries have
grown without interruption, and most of
their markets are well above pre-crisis
levels. Moreover, the economies of many
of the crisis-affected nations have begun
to grow as well, and with this, the commitment to reform in some seems to
have flagged. The risk is that, at some
point, the excesses may simply become
too great, and the inevitable consequences follow.
The economy
It is clear that the economic condition of
the US today is dramatically better than
it was a decade ago. Some have
extrapolated from this to projecting a
robust and untroubled future. The move
to an information-based economy may
well be as profound a transformation as
the move to an industrial economy was
for its time. But some see it as more
than that. They see a new paradigm
that renders irrelevant so many traditional concerns about downturns, risk
and sound policy. They fail to see that
there are no guarantees, that there are
real risks, and that much depends upon
whether business and government act
to realise the opportunities and deal with
the risks.
I profoundly disagree with this view.
This view of the economy is contrary to
all of human history with respect to markets and economies, and that should be
a sobering caution.
Clearly, the new technologies are of
profound importance to our economy.
But they are not the first new technologies of great economic significance. The
telephone, the automobile, the harnessing of electricity, the railroads, the development of mass production, and modern medicine all transformed the age in
which they occurred. But none of them,
separately or together, produced oneway prosperity.
At the core of how markets and
economies work, there is something
very fundamental in human nature – a
tendency to go to excess by overemphasising the positive and underweighing risk when times are good –
that is unchanging. What has struck me
recently is how all aspects of financial
life are pervaded with the assumption
that ‘All will always be well’, that any
interruptions will be temporary and mild
at worst, or solvable, most likely, by the
Federal Reserve Board and, in any
case, quickly overcome by a renewed
focus on the promise of the long term.
Before I go on, I want to be clear about
one thing: I am not expressing any
views with respect to the level of the
stock market, but simply that we must
act in all financial matters with balance
and discipline, and that discipline tends
to get lost in good times.
It seems to me that modern capital
markets, combined with the tendency of
lenders to forego discipline in credit
extension during good times and the
structural weaknesses of many emerging market financial systems, creates at
least the possibility – not the certainty,
but the possibility – of further disruptions
in the years ahead. And the more we forget that the underlying factors that con-
Robert E Rubin
‘My
comments
may seem
a bit dour.
Perhaps
that is the
way former
secretaries
of the
Treasury
sound, or
maybe I’ve
just seen
too much
over too
many
years’
tributed to the recent disruptions still
exist, the greater the likelihood of future
disruptions.
In some ways, these are new or
heightened risks, but in another sense
these are not new risks, but the oldest
risks of all – complacency, loss of discipline, and over-reaching. Back in the
days when I was on a trading desk, we
called this ‘reaching for yield’. It was
clearly evident prior to the Asian financial crisis.
Trade and international
economics
Future economic conditions will be
greatly affected by whether the world
presses forward with trade liberalisation. Yet continued expansion of trade
faces great difficulty – and even the
possibility of reversal and moving
backward. Similarly, openness to economic change, and to the advance of
technology, could also face a backlash
around the world.
I could sense some of this coming in
meetings with foreign officials during
the last year or two that I was at the
Treasury, when the talk would turn to
more general matters and they would
express concern about the uneasy
political environment in their respective
countries around globalisation and
change. More recently, I noticed press
references to the concerns of some EU
officials about the unsettling effects of
rapid change – and the suggestion that
much of this, revolving around technology and market-based economics,
was too ‘American’.
The big story in Seattle, in my view,
was not the street demonstrations but
that each part of the global trading
system, gathered together in pursuit of
trade liberalisation, was so resistant to
reducing barriers in its own most politically sensitive areas; for example,
Europe on agriculture and the US on
its dumping laws.
Moreover, there is an almost universal unwillingness amongst politicians
to explain to their people that the benefits of trade derive not only from
exports, but from imports as well.
Imports lead to lower consumer
prices, greater productivity through
increased competition, lower inflation,
lower interest rates and higher standards of living, but no politician wants
to say this.
But trade, like technology, creates
winners and losers, increases dislocation, and prompts anxiety even
I Summer 2000 I LSE Magazine I 13
*Mag Summer 00 (152)
28/2/05
11:25 am
Page 14
Kosovo is no longer the focus of world attention. The war is over.
LSE student Jehona Gjurgjeala gives her personal view of the aftermath.
No guarantees, real risks
MARY EVANS PICTURE LIBRARY
New technology in 1878 – Bell’s original telephone apparatus
among those who are doing well.
Throughout his presidency, President
Clinton has advocated combining trade
liberalisation with an active domestic
agenda. The objective of this combined
agenda is both to better equip our people to prosper in a rapidly changing
global economy and to increase their
confidence in their ability to do so. I
believe such an approach, combined
with far more public education on the
benefits of trade, can restore the consensus for trade liberalisation that has
existed at many points in many of our
nations over the years, and that it will
be difficult to move forward without
restoring this consensus.
Income inequality
A third threat to our economic wellbeing is the vast income inequality
within developed nations, within many
developing nations, and between the
developed and developing worlds.
Vast income inequality within nations
is a broad-based phenomenon. Even
the recent strong economic growth in
the United States has still left over 12
per cent of our population under the
poverty line. The appropriate response
to our inequality is not income redistribution, but investment in our people,
including greatly increasing support for
equipping the less well off to function
14 I LSE Magazine I Summer 2000 I
effectively in the mainstream economy.
The other aspect of vast inequality is
among nations. According to one
study, at the beginning of the 19th century, the ratio of real incomes per capita between the world’s richest and
poorest countries was three to one. By
2000, it had risen to 60 to one.
During my own time in government,
it was clear the affluent make themselves heard; the middle class makes
itself heard; the poor are too rarely
heard and too little represented.
Sometimes, the affluent seem to have
a gated community approach, feeling
that their wealth is protection against
the problems flowing from poverty. I
think this is dramatically not so.
Firstly, lifting people out of poverty
increases productivity, boosts market
demand and reduces social costs, and
so contributes to overall economic
well-being for all of us. Secondly,
poverty – especially in a world of visible
affluence – creates understandable
alienation and anger. At home, that can
lead to crime, drugs and other social
ills with economic costs. Internationally,
that can lead to political instability, support for extreme nationalism, social
strife, and terrorism, all rendered even
more dangerous with the spread of
weapons of mass destruction and their
miniaturisation for delivery anywhere.
Similarly, global environmental degradation, the spread of disease, and illegal immigration, can all be greatly
exacerbated by the poverty in developing countries.
While there has been real economic
progress in many developing nations,
due probably more to their own policies than to assistance, vastly more
needs to be done, and it is in the economic self-interest of the industrial
nations to provide far greater assistance and, perhaps even more importantly, far greater access to our markets. Moreover, there should be greatly
increased focus on broad-based sharing of the benefits of growth within
developing nations.
The risk of systemic
financial crisis
The powerful, largely positive force of
international finance poses a fourth threat
to our economic well-being. We need a
financial architecture as modern as the
marketplace. We must try to find ways to
induce greater discipline among lenders,
investors, and all others who participate
in financial activity, especially during good
times. But how to do this is no easy
thing. To give just one example, unless
the private sector shares the burden of
addressing financial crises, we face the
very real problem of ‘moral hazard’ as
lenders and investors assume they will be
rescued if things go wrong. Yet in practice, the imposition of private sector burden sharing can precipitate the very crisis
we are trying to avoid. Similarly, we really
don’t know what kind of exchange rate
regimes make sense for all but the largest
countries.
As in many turbulent eras gone by,
the great challenge before us is not only
moving forward in the intellectual
response to complicated substantive
issues, but also winning the battle for
people’s minds in support of good policy. The politics of meeting the challenges of our era is as important as the
policy, since if the politics does not
work, the policy won’t happen.
One of the greatest problems is how
to work effectively on transnational
issues that can profoundly affect the
global economy and each of our
economies in a world of sovereign
nations. Moreover, in an interdependent world, each of us has an
increased stake in what happens within other nations. How to deal with this
powerful interest in what happens in
each other’s countries, in a world of
sovereign nations, is another area that
needs new thinking.
We face an era of great economic
opportunity, that warrants considerable
optimism, but there is much to do to
realise these opportunities and to minimise the risks. Moreover, these challenges will in many cases require the
development of new analytic constructs
and new political approaches. Those
whose only concern today is bits and
bytes and what the Federal Reserve
Board might do, need to look back over
the 20th century, and really all of human
history, to gain a perspective on the full
range of issues that are likely to affect
our economy and the global economy in
the decades ahead. ■
Rebuilding Kosovo
t four o’clock in the
morning one night in
March this year, my
parents were woken
by the sound of
breaking glass. They
woke up to see the
whole neighbourhood
in darkness. My dad got up and looked round
the rooms to see if anything was broken – he
couldn’t see anything and they went back to
sleep. In the morning, my dad went into my
room to find that one of the windows in my
room had two bullet holes in it. The bullets had
pierced the window and the wardrobe and
stopped among the clothes inside.
This story tells you more than you think about
Kosovo, all boiling down to the fact that what is
de facto an independent state is in grave danger because it has no effective superstructure
to support it. The UN, as Kosovo’s administrative wing, and KFOR, as its security wing, have
inherent faults, faults which are proving costly
for Kosovo itself. As a consequence, Kosovo’s
bins are constantly blazing because rubbish
collection is infrequent and bins are overflowing; there are power cuts as there is no efficient
production of electricity; the traffic is hectic
because traffic lights have been pulled out of
the ground and there are no traffic regulators.
The list is endless.
But these occurrences, although hampering,
are not fatal. In time, these things will get better. There is an area, however, which is
absolutely frightening with regards to reconstructing Kosovo. It is symbolised by the bullets
through my window. Security. Kosovo was a
police state controlled by Serbs with more than
10,000 policemen during the ten years of their
rule. The situation now is that Kosovo is policed
by barely 1,000 UN policemen who are portrayed in caricatures in Kosovan newspapers
as drinking Coca-Cola all day as crime happens in front of their eyes. Their flippancy is
appalling – my friend witnessed a scene where
the traffic junction in Pristina was at a standstill,
as none of the traffic lights were working. A UN
police vehicle came over, a policeman got out,
managed the traffic back into a working order,
got back into the UN car and drove off, leaving
A
the traffic junction to return to the mayhem it
was before. Comical, but dangerous. A low
level of policing is dangerous even for a civil
society, let alone in a country that has just
undergone three months of all-out war, preceded by ten years of oppression and one year of
localised war.
The first month after the war in Kosovo was
marked by a shameful period of killing, looting,
burning, all under the name of some patriotism
but which all boiled down to straightforward
crime. This pattern of crime, although greatly
reduced, has still allowed the emergence of a
stratum of people who now engage in criminal
acts of theft and assault throughout Kosovo.
The country does not have the superstructure
to deal with it right now. By the time it has, it
may be too late.
I have left out mention of NATO-led KFOR on
purpose, for they are a story on their own.
Kosovo’s security jurisdiction is divided into five
sectors: British, American German, French and
Italian. Although the official story is that they
are all co-ordinated by the joint HQ in Pristina,
subsequent months and especially events in
Mitrovica have highlighted that this is not
entirely true. To be fair, KFOR have been the
most effective force present in Kosovo. But it
has turned out that how secure you are
depends on which sector you live in. Kosovars
in the German and American sectors seem to
be the luckier ones – the imposition of a curfew
and other security measures have reduced the
level of crime in those areas. In the British sector the situation can be very commendable
depending on whether the British think it reasonable to intervene – for example, during
Christmas and New Year celebrations army
policing was greatly increased in Pristina and
consequently there were very few incidents in
town. But somehow, in its day-to-day running,
Pristina seems to lack the policing hand of the
British KFOR. This is very unfortunate as it has
allowed the establishment of crime structures
which may have been stopped, or at least significantly reduced, if measures had been taken
earlier to prevent them.
The failure to think about these issues last
June has caused many problems for the international administration in Kosovo. As in other
sectors, the French army have had a great deal
of autonomy and discretion when dealing with
ethnic and criminal issues in its northern sector. When I was there last summer I had great
fears about the situation in Mitrovica. It was
obvious that the French army’s tactic of simply
separating the Serb and Albanian communities
at the bridge, and giving each community free
reign in their respective ‘kingdoms’, was not a
good long-term solution – for no other reason
than that both communities had homes and
friends on the other side. The recent violence
there has proved me right. I hope that KFOR
itself has realised that this autonomous
approach to Kosovo is not the best policy and
that all sectors should have been ruled with
more uniformity.
I know there is still great debate on the legality and the rightness of NATO’s intervention in
Kosovo. I do not deny that my support for the
campaign is more emotive than rational, but I
still think, in principle, that if funds allow it, such
interventions are right. But what western governments need to work on, and this applies to
any situation in which foreign troops and organisations play an important role in the interim
governing of a region, is systematised administrative and security procedures. I have heard
suggestions of creating a UN ‘rapid reaction
group’, trained in the immediate takeover of
administrative and governing duties of a region
in a state of emergency, rather than weeks of
waiting while countries gather their staff for
these operations. In addition, no autonomy
should be allowed within the military corps – a
single chain of command should mean exactly
that. Kosovo has been the archetypal ‘guinea
pig’, showing what happens if these components do not exist. While we Kosovans will have
to bear the consequences, the international
community should concentrate on creating
structures which could save other world trouble
spots from the same fate. ■
JEHONA GJURGJEALA
IS A SECOND YEAR UNDERGRADUATE STUDYING FOR
A BSC IN GOVERNMENT. SHE HAS ALSO WRITTEN ON
KOSOVO FOR THE OBSERVER NEWSPAPER.
I Summer 2000 I LSE Magazine I 15