Fischer calls for “fairer” globalization
Almost everyone agrees that the world could be a better place and recognizes that much work will be required to improve it. Why, then, is so much of the globalization debate about whether the world is getting better or worse? The reason, Fischer said, is that this debate is ultimately about policies. “The implicit premise is that if the world is going to hell, then the policies of the past 50 years are likely to be wrong and if the world has been getting better, then the policies are more likely to be right.” It is a separate question, he argued, whether all recent developments in global conditions can be attributed to globalization.
A set of policy recommendations for reform-minded countries that has received much attention and a large share of negative press is the so-called Washington consensus set out by economist John Williamson in 1990. Fischer regarded its 10 elements—which included fiscal discipline, tax reform, financial and trade liberalization, deregulation, and privatization—as a useful shorthand description of part of a desirable policy orientation.
What do the data show?
Globally, poverty rates have been declining, especially in Asia, Fischer noted. Developments in income distribution are more mixed, with the evidence showing that inequality has increased among the average income levels of different countries while possibly decreasing among all individuals in the world. On average, social indicators including literacy and health have improved significantly in the developing countries. It thus appears that, on average, conditions in the developing world have improved. But, Fischer emphasized, this is not the same as saying that everyone in the developing countries is doing better.
Trends in global poverty figure prominently in the globalization debate. But the facts alone do not, Fischer noted, directly address the issue of whether the trends are caused by developing countries’ increasing integration with the global economy. To address this question, we must assess the impact of openness on growth.
Trade policy is a central aspect of economic policy. Many studies have shown that greater openness to trade is associated either with higher levels of income or with more rapid growth. And countries that have adopted export promotion strategies have achieved greater economic success than those that have sought to keep imports out. The evidence and the studies, he observed, should persuade many that openness to the global economy is a necessary, though not sufficient, condition for sustained growth.
Clearly, the major challenge facing the world today, Fischer said, is poverty. And the surest route out of poverty is economic growth. Growth requires good economic policies set in a policy framework that prominently includes an orientation toward integration with the global economy. A way must be found to make the global system deliver economic growth more consistently and more equitably.
Global growth is determined mainly by the performance of the industrial countries, and attitudes toward globalization in these countries are key to the future of the global economy. Governments in these countries should stand up and support the right policies; help their own people deal with the adverse consequences of economic change; and deliver on their promises on trade, aid, and the strengthening of the international economic system.
Although most of the world’s poor are moving toward sustainable growth (notable exceptions are some countries in Asia and Latin America), Fischer said that the most profound problems of poverty were increasingly concentrated in sub-Saharan Africa. It already has the world’s highest poverty rate, and the number of poor has been rising rapidly. In addition, HIV/AIDS is taking a tragic toll.
National and global policy challenges
All countries have challenges to surmount if globalization is to benefit more of the world’s citizens.
Implementing the right policies. The outward-oriented policies described in the 1990 Washington consensus, Fischer said, remain an important component of the right approach to economic policy, but also needed are a greater emphasis on social justice, more effective economic governance, crisis-proofing economies, and labor market reforms that allow more of the workforce to enter the formal labor market.
Delivering on trade and aid. The industrial countries need to do their part to facilitate developing countries’ integration with the global economy. That means liberalizing agricultural trade and ending the massive subsidies to agriculture that impede the exports of so many developing countries. At the same time, the developing countries can achieve major gains by opening up trade to each other.
Making the international financial system less crisis prone. The shift to flexible exchange rates 30 years ago and the strengthening of macroeconomic policy frameworks have helped prevent foreign exchange crises among the industrial countries, Fischer noted. But emerging market countries are still disturbingly prone to crises. Although their shift to more flexible exchange rates will make their financial systems more stable, crises can erupt for other reasons, particularly market fears that these countries’ debts are unsustainable.
Dealing with migration. Flows of labor, either temporary or permanent, are a potentially powerful force in the global economy, Fischer said. But, national economic, social, and cultural preferences are bound to take a front seat in this area. Moreover, greater clarity is needed on the economic effects of alternative policies—an area in which more public policy attention will eventually be focused.
Improving governance. Ordinary people everywhere want to improve their lives. But corrupt governments do not necessarily respond to those desires. That is why, Fischer argued, the trend to democracy is so important.
While countries are primarily responsible for their own fates, he said, outsiders—from both the public and the private sector—can influence outcomes by promoting democracy, investing in economic activity, and supporting good projects in social sectors. Through their actions, they can also help fight corruption in developing countries. With a nod to Winston Churchill’s famous observation about democracy, Fischer concluded that “the pro-market, pro-globalization approach is the worst economic policy, except for all the others that have been tried.”
Tribute to Rudi Dornbusch
“Collaborating with Rudi,” Fischer said of his coauthor on the textbook Macroeconomics, “has given me as much satisfaction as anything else I have done in my professional life.” In opening remarks at the Richard T. Ely Lecture, Fischer paid tribute to Dornbusch’s many contributions to the theoretical and policy fields, from his influential “overshooting” paper to the equally famous 1994 Brookings Institution paper that predicted the Mexican peso crisis. Dornbusch was, Fischer said, “one of the outstanding policy economists of our time.” Fischer indicated that he often called Dornbusch to discuss difficult situations at the IMF. “His advice was always thoughtful, typically nuanced, and frequently provided insights that no one else had seen—and he was willing to talk as long as it took,” Fischer said. “We will miss Rudi deeply for his incisive mind, the brilliance of his insights, the exuberance of his writing, and his challenges to conventional thinking—but most of all, for his friendship and the pleasure of his company.”