Journal Issue

Interview with Daniel Yergin: Confidence in markets rose after the 1970s, but the pendulum may be swinging back

International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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Loungani: What is the grand theme of The Commanding Heights?

Yergin: There are two: how governments and markets have tussled for control of the commanding heights—Lenin’s term for strategic sectors—of the economy and the big, bruising debate on the effects of globalization, particularly the new wave of globalization that started with the fall of the Berlin Wall. World trade has doubled since that time.

Loungani: Not exactly escapist fare. How has it been received? Will it be shown outside the United States?

Yergin: The reviews have been excellent, and the response positive—from the policy communities, the private sector, and academia. It’s also very gratifying to hear from people that their teenagers sat engaged through it all. It was surprising to find, at one point, that the video was outselling the Star Wars trilogy on Amazon. We expect that the series will be appearing on television networks in dozens of other countries. There’s also a very good website [] that goes with the series.

Loungani: The difficulties of defining what globalization is and when it began don’t seem to hamper the debate over its effects.

Yergin: Yes, I agree. My son insists that globalization began in 1964 when the Beatles made their first worldwide tour. Others might say it has been going on for 500 years since the invention of movable type and the “age of discovery.” So there’s arbitrariness about the choice of date. I think modern globalization started after World War II, when wise people sat down and reflected on the lessons of the two World Wars and the Depression and took steps to keep these from happening again. Eight rounds of trade negotiations, leading to an enormous expansion of trade, occurred in the period that followed. I would date the second age of globalization to the end of communism, which was followed by an enormous increase in trade during the 1990s.

Loungani: You champion free trade, but others take a more guarded view of its effects.

Yergin: Trade has been the way out of poverty for many countries. Unfortunately, countries that do well as a result of trade get shunted off the board of the debate and, strangely enough, don’t seem to count in the argument. Forty years ago, Singapore was so poor that some people doubted it would make it as a country. Today, its per capita income is higher than the United Kingdom’s. Korea and India had similar levels of per capita income in the 1960s, but today Korea is 20 times richer. Why? One big reason is that it engaged with the world economy, and India did not. There were a lot of other differences between the countries, but that has to be a key one. India has clearly done better since it opened up. The most dynamic players in today’s economy are the new globalizers. One of the basic lessons of history for me is the power and importance of trade as an engine for reducing poverty. The concept of “the gains from trade” is so obvious to economists that they take it for granted that other people get it, but many don’t.

Loungani: What about the effects of trade on income inequality? Some argue that trade—globalization and markets more generally—leads to an unequal division of the spoils.

Yergin: Deng Xiaoping wrestled with this question in China during his years of house arrest, following which he came up with his famous statement, “I have a choice—I can distribute wealth or I can distribute poverty.” You can have a system in which everyone is equal and very poor. Or you can have a market system, which works through incentives and unequal distribution of the gains in income. And there’s always a risk with market systems that things go to excess. Greed runs away; values decline; and corruption increases. But you have that same risk in controlled systems, as the experience of the communist countries showed.

Loungani: Many point to Africa as an example of the perils of globalization—how it helps some countries but leaves others behind. And they often blame the IMF and the World Bank for Africa’s plight.

Yergin: These are examples of what Jagdish Bhagwati calls the “fallacy of misassigned blame.” I was on a television show recently where the other guest said the IMF and the World Bank were responsible for AIDS in Africa. Pardon me? Is it because of health crises, corruption, lack of law, barriers to entrepreneurship, wars, and ethnic conflict that so many African countries are suffering, or is it because of globalization? I also find it difficult to accept that trade and globalization increase the potential for conflicts or other problems. India may be on the verge of a conflict at the moment, but would it make sense to say that it’s a result of the enormous increase in India’s exports of software products?

Loungani: Let’s talk about the tussle between markets and central planning. Cato Institute’s Brink Lindsey says in a new book that the dead hand of statist thought still pervades much of the world.

Yergin: You have to recognize a shift toward greater confidence in markets since the 1970s, even if, as Lindsey says, implementation is lagging in many countries. In the United States in the 1970s, you had wage and price controls; in India, an emphasis on a mixed economy; throughout the developing world, with the exception of East Asia, a profound distrust of foreign capital. Theories of international relations talk about the balance of power. In discussions about markets versus the state, it’s useful to think of the balance of confidence. I think the balance of confidence has clearly shifted toward the markets. Very recently, the pendulum may have swung back some the other way.

Loungani: Why?

Yergin: A number of reasons. The increased emphasis on security since September 11 obviously gives the state a bigger role. Argentina’s experience raises questions in some minds about whether markets deliver. And then Enron and other companies raise issues of corporate governance, whether markets can be self-governing or will need a heavier dose of government regulation, or at least some reworking of regulation. Right now, the focus is on corporate governance. Of course, at least right now, there’s less economic optimism and more anxiety.

Loungani: Of those three developments, Argentina is obviously of great interest to us at the IMF. What do you make of its experience?

Yergin: For many years, Argentina was the poster child for reform, and Russia was the bad boy. Now there’s been a reversal of fortunes. Argentina is facing an economic nightmare. Some will want to blame reform, the movement to markets, and—as you well know—the IMF. But it certainly seems that the real problem was the failure to reform enough. Argentina’s reforms really stopped in the mid-1990s. A political culture that built up a $142 billion debt that could not be serviced, the nature of federal and provincial relations, corruption—these seem to be some of the problems.

Loungani: Whatever the sources of the problems, does the Argentine experience risk derailing market reforms in the region as a whole?

Yergin: People should look at the individual countries more closely and compare, for instance, the experiences of Argentina and Chile. In his interview for the program, President Ricardo Lagos Escobar of Chile says that reforms prepared his country for a more open world. Remember, this endorsement comes from someone who was a great opponent of Augusto Pinochet; he was slated to be Salvador Allende’s ambassador to Moscow. Chile has now had 14 years of democracy and has done quite well. Mexico continues to show the benefits of integration with the world economy. Venezuela is in a difficult situation. In Brazil, a lot will depend on the outcome of the presidential election. Overall, there are question marks now and much less optimism.

Loungani: Your book The Prize said that “oil is 10 percent business and 90 percent politics.” Is that still true?

Yergin: That statement is about the oil business in the 1930s, but it underlines the peculiar nature of oil. Politics is still very much a part of the business. Most of the time, oil is just another commodity. But it hasn’t lost its ability to quickly become a unique strategic commodity, because it’s tangled with geopolitics in a way no other commodity is. For the most part, we have a big, complex, and resilient oil supply system—it’s really quite amazing how large it is and how well it works. And it’s increasingly driven by the market. We’ve moved from national champions to international brands even in the power business. We have global electric utilities. We have Russian private oil companies, still with a state tinge, but quite different from what was there before.

Photo credits: Denio Zara, Padraic Hughes, Pedro Márquez, and Michael Spilotro for the IMF; Bretton Woods Committee, pages 200-201.

But it’s a business that is still susceptible to politics. There are battles in Venezuela. There’s uncertainty about how things will evolve in the Middle East. A lot of forces are at work in that region, from demographic pressures to the influence of satellite TV, whose impact is becoming clearer. When I interviewed Margaret Thatcher for The Commanding Heights, she reminded me of Thatcher’s Law: “The unexpected happens.” That’s a fundamental maxim of energy security. That’s why there has been a “fear premium” as high as $5-$6 in the oil price in recent months, although it’s now down to $2 or $3 a barrel.

Loungani: One segment of the series deals with the Asian financial crisis and the ones that followed. In your view, what caused the Asian crisis?

Yergin: It erupted partly as a result of weak capital markets, the buildup of short-term debt, corporate governance issues, and the emergence of China as a competitive trading force after 1994. As an economic historian, I also see it as the bursting of a classic bubble. People forget the ebullience of the period just before the crisis, around 1995-96. After a decade of solid growth, Asia represented the future. “Asian values” were to be paramount. In the series, we cite an interview with a chief executive officer who says, “If we are not in Asia tomorrow, we’re too late.” This bubble replicated the Japanese bubble of the 1980s. In fact, I had wanted to dramatize this in the series through a bullet train starting out in Tokyo, going into a tunnel, and ending up, visually, in Southeast Asia.

Loungani: Many IMF staff, including me, found your treatment of the IMF’s role in the crisis very balanced.

Yergin: Thank you. Our main purpose was to tell the story clearly and cogently rather than deal in cliches and assign blame. It was a difficult and constantly evolving situation, and people at every stage were caught by surprise. It just went on and on—Thailand, Korea, Indonesia, Russia, the Long-Term Capital Management hedge fund, Brazil. However, people need to go back and see what lessons they can learn about the right policies for the future. Are high interest rates necessary to stabilize the currency and the economy, or do they kill the economy? How high should interest rates be? We need a dispassionate analysis of this question. What kind of money flowed out first from the Asian countries? The evidence suggests that a lot of this “hot money” was short-term bank lending by Japanese and European banks and money belonging to local nationals.

Loungani: Yet if it was the bursting of a classic bubble, as you suggest, even if we had an answer to such questions, it would be difficult to prevent crises completely.

Yergin: Of course. Coming away from the whole span of history covered by the series, you realize how deadly debt can be, whether it’s 1929–31 in the United States, the Asian crisis, or the telecom bust still unfolding today. People build up debt on the assumption that things will remain on the track they have been on for the past few years, without an awareness of how much debt is in the system as a whole—and without much thought that economic circumstances can change radically. When things are booming, no one wants to be left out. That seems the bigger risk. There’s a kind of competitive frenzy. There’s always a lot more debt and many more vulnerable institutions than people are aware of. All this is not to disparage the steps that have been taken—the initiatives to improve transparency, better monitor private debt, and caution about liberalizing the capital account too quickly.

Loungani: Our Managing Director, in an impromptu remark recently, said that he was concerned that, “despite all the rhetoric, the world is in a difficult situation and is threatened by fragmentation.” Reactions?

Yergin: I find that very striking. It resonates with our own research. We work with three scenarios of the future: “globalism,” “leviathan,” and “fragmentation.” To me, the eeriest quote in the series was [Friedrich von] Hayek’s remark: “We didn’t realize how fragile our civilization was.” He was referring to the assassin’s bullet in 1914 that unleashed 30 years of untold misery. The IMF and the World Bank emerged from Bretton Woods in 1944 because wise, farsighted people sat down to learn the lessons of those 30 years and how things could be prevented from going wrong again. What were those lessons? They were about avoiding fragmentation and the breakdown of cooperation among nations.

We still live in a world of nation-states and a global marketplace. We need to get the right rules in place so the global system is more resilient, more beneficial, and more legitimate. International institutions have a tough but indispensable role in this. And you all have to do your jobs while coping with uninformed animosity. At times of stress, I hope you can draw inspiration from the founding fathers at Bretton Woods and remind yourselves of their vision for the future and of the resolve and farsightedness with which they set about their historic work.

The series, The Commanding Heights: The Battle for the World Economy, is on video and available from or WGBH-TV Boston at (800) 949-8670).

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