High-Level Expert Group Meeting
18-20 MARCH 1997
WASHINGTON, D.C.
Chaired By Lord Callaghan of Cardiff
Introduction
1. Since the 1970s, the far reaching changes that have
taken place in the world economy have been collectively
called globalization. This term describes the extension of
the traditional patterns of international economic
activity to high levels and to new areas: technology,
trade, production, finance, investment, and information.
New regions of the world have been embraced.
2. The first major development is the dramatic advances
which have been achieved in information technology in the
past two decades. As telecommunications and computers have
become more sophisticated, the flow of information between
geographically distant parts of the globe has dramatically
increased. International enterprises are able to disperse
production world-wide whilst retaining tight day by day
control.
3. The second major development and, to a considerable
extent, a corollary of this information revolution, is the
acceleration and intensification of international
financial flows. Over the last two decades, we have seen a
progressive shift from segmented national finance markets
to a single global finance market characterised by an
enormous pool of highly mobile funds.
4. The third major development, again heavily influenced
by the information revolution, is the incorporation of new
regions of the globe into the open world economy. The
ongoing transition of Russia from state socialist to
capitalist market economy, the increasing marketization of
the Chinese economy, and the liberalisation of many less
developed economies, has for the first time lent the open
market system a truly global scope, and added a huge new
labour force to the world market.
5. These developments have acted to integrate the world
economy, and at the same time to intensify competition
between individual countries as both the number of
players, and the size of the stakes, have increased. This
intensification of competition has qualitatively changed
the nature of the market place, necessitating a radical
shift in economic policies and business strategies.
6. These developments are unstoppable and offer
significant opportunities to raise aggregate living
standards across the world in the long term. Economies in
Asia, and increasingly in Latin America, which have
embraced this shift and pursued export oriented, open
market strategies, have succeeded in capturing vital
foreign investment and vital market share, and thus
attained high levels of growth. In the medium term this
will increase their political influence.
7. Globalization will not of itself improve a nation's
economic well-being. The new conditions have created the
potential for serious problems in the world economy. These
problems can be categorised in terms of:
(a) A danger that the scale of capital movements and the
lack of regulation may permit a serious dislocation to
occur within financial markets with serious ramifications
for the world economy as a whole.
(b) A danger that, whilst many countries have succeeded in
taking advantage of the opportunities of globalization,
others, most noticeably in sub-Saharan Africa, have failed
to do so, and are becoming increasingly marginalised in
what has become a two track world economy.
(c) A danger that developed economies will fail to adjust
to the increased competition in the world economy, leading
to a backlash against globalization and a squandering of
the opportunities offered by it.
8. Such risks must be managed and overcome. It is
essential that we do not allow the reality of
globalization to persuade us that nothing can be done to
address the challenges that it poses.
Whilst nation states may have declined in power, they
retain a considerable scope for action within their own
boundaries, and they can recover many of their previous
capabilities by multilateral cooperation. Globalization is
an opportunity we must take advantage of, not an alibi for
inaction. The future welfare of all the world's peoples
cannot become a mere handmaiden of impersonal
international market forces. Bold and enlightened
leadership, and close co-operation will be required.
Stabilising the international financial system
9. The scale of current international financial flows, the
impact of speculative movements, and the rapidity with
which such movements take effect and spread across the
globe, raise the danger of a serious dislocation occurring
in financial markets.
Yet the decline of the Bretton Woods system, and, more
broadly, of the capability (and readiness) of the US to
play the role of hegemonic stabiliser, has deprived the
markets of the regulation necessary to control such
dislocations and minimise the danger of their
destabilising other sectors of economic activity.
10. In this context, the contemporary failure to cooperate
on financial matters recalls the failure to cooperate on
trade matters in the 1930s, with all of its attendant
consequences of depression, widespread unemployment, and
even social disorder.
It is evident now that there is a disconnection between
the competitive economic strength of some countries and
their exchange rates.
Whilst attempts to manipulate exchange rates and tax
levels in order to capture investment opportunities may
seem beneficial to individual states in the short term,
such a stance will inevitably have negative ramifications
at a systemic level in the long term. Cooperation between
the major groups of economies is an essential prerequisite
for successful management of the changes implied by
globalization.
11. The existing framework of international institutions
is inadequate for the needs of the next century, and
should be overhauled and strengthened. Formerly excluded
powers must be swiftly and fully incorporated into its
structure. As regards the G7, the expansion of Russia's
role is a positive move, and this status should also be
extended to China. Both should also be permitted, and
assisted, to fulfil the obligations that will enable them
to participate as full members in all world
institutions.
In its early days the Group of 7 fulfilled a useful
co-ordinating and informing purpose and it could once more
fulfil such a role if it were to abandon its present
practice when the leaders meet, of a formalistic exchange
of bureaucratic positions uttered largely for the benefit
of domestic audiences.
Such meetings need a much smaller bureaucratic involvement
and hopefully a much reduced media presence. Participation
should eventually be extended to nations such as India and
Brazil, and the dynamic economies of the Asian community,
as they grow.
12. A single European currency, as envisaged by the
Maastricht treaty, would go a long way towards
establishing a more stable equilibrium between the United
States, Japan, and the European Union, as the controllers
of the three major reserve currencies, imposing a
disciplining effect on individual states, and providing
the basis for genuine cooperation to address systemic
problems.
13. Prudent domestic policy is an essential prerequisite
for exchange rate stability, but it is not of itself
sufficient. There is a need for urgent consultation and
co-ordination on the extent to which any country is able
to manipulate exchange rates for domestic purposes.
(i) Whilst recognising the difficulties involved, we
reiterate the recommendation to explore the possible use
of target zones, put forward in the InterAction Council
report ''To create a stable international financial
system,'' (Geneva, March 1996, para 22).
(ii) The ability of countries to carry their foreign debt
in their own currencies should be curbed. This has
permitted certain states to escape the consequences of
unsound fiscal policy by destructive exchange rate
policies. They have been able to run up excessive debts,
and yet export the burdens to other countries by
devaluation.
14. A further area of concern is the growth of derivative
trading. Whilst such instruments undoubtedly perform a
useful role in the international financial markets,
participants can be exposed to unacceptable losses when
they are improperly used, with serious spill-over
consequences for markets. Areas which demand immediate
attention are how far non-banks should be permitted to
trade, the requirement by law of larger margins, and the
regulation of over-the-counter trades.
Reintegrating developing economies into the world
economy
15. Many developing countries are ill positioned to take
advantage of the opportunities offered by globalization.
The problems caused by their inadequate educational
provision, widespread health problems, excessive
population growth, and low population welfare levels,
prevent them from attracting the foreign investment
necessary to development. Other factors such as large
international debts, high military expenditure, weak
government structures, and endemic corruption, also
inhibit their healthy development.
As a result, certain regions, most noticeably sub-Saharan
Africa, are becoming increasingly marginalised in what is
fast becoming a twin track world economy.
The most important challenge facing us today in regard to
these developing economies is to reintegrate them into the
world economy.
16. Development Policy: Fast sustainable growth is a top
priority and should be an essential part of IMF and World
Bank policy. Whilst, for example, fiscal concerns,
environmental concerns, and the role of women, are
priority issues, the elimination of poverty will not be
achieved by these in isolation. The rural population
constitutes a majority in all of these countries, and
giving priority to a reasonable financial return for their
produce would do much to stimulate faster growth.
The constant switch of donor priorities in the past has
been a major obstacle to consistent development, a
constant shifting of goal posts which has prevented any
coherent, long term strategy from emerging. The tendency
to subordinate growth to other objectives has ignored the
fact that, without it, other problems are liable to remain
insoluble. Only if the overall objective of growth is
prioritised will developing economies gain the resources
to solve their problems for themselves.
17. Investment: Central to achieving fast sustainable
growth is the ability to attract foreign investment.
Multilateral institutions have a vital role to play in
creating an environment attractive to such investment, by
fostering efficient government, legal reform, banking
reform, and the development of capital markets.
18. Official Development Assistance (ODA) remains an
essential tool for promoting such growth, but it is not
without its problems. Three reforms are necessary:
(i) ODA should be targeted with much greater selectivity.
The current scatter gun approach to much of it is too
indiscriminate to produce results.
(ii) ODA should be cut off from those countries which
refuse to cut excessive defence spending. Otherwise, aid
becomes little more than a substitute for resources
directed to the defence sector.
(iii) ODA should be focused on those countries which make
adequate efforts to control population growth and raise
population welfare levels. Unless this problem is
addressed, real growth in per capita incomes will be
extremely difficult to achieve regardless of the level of
aid.
Four central areas should be given greater emphasis in
ODA:
(iv) Education: if developing economies are to participate
fully in the world economy it is essential that they be
equipped with the skills necessary to meet foreign
competitors on an equal footing.
(v) Disease control: in sub-Saharan Africa, for instance,
infectious diseases (especially AIDS) and parasitic
diseases (especially Malaria) cause 53% of all deaths
between ages 15 and 44. In addition to current health
assistance, biomedical support would seem to hold out the
possibility of considerable gains.
(vi) The role of women: In order for family planning
programs to succeed it is vital that they be preceded and
accompanied by adequate education, especially for women,
and legal reform to permit women to engage in business in
their own right.
(vii) Social protection: In addition to family planning
programs, attention to social protection might enable us
to address some of the root causes of the population
growth, enabling people to have fewer children without
fearing that they would be left unprovided for in old
age.
19. Trade: The current terms of trade discriminate against
many developing economies, particularly sub-Saharan
African states. There is a serious danger that, as the
world increasingly organises into preferential blocs, and
privileged hinterlands, such states will find themselves
effectively excluded from the international trading
system. This inequity must be addressed and fairer terms
of trade established.
In particular, given that the highest proportion of the
population is employed in agriculture in such economies,
developed states could make a great contribution to
development by reducing and then eliminating the subsidies
they currently provide to their own agricultural sectors.
These subsidies not only undermine developing economies
but also represent a serious distortion within their own
societies. Whilst it must be recognised that this might
have a detrimental impact on rural areas, this could be
more than offset by transferring a portion of the money
saved to rural regeneration projects.
Restructuring developed economies to meet the challenge
of globalization
20. Many developed economies are failing to adjust to the
new conditions created by globalization. Sectors of
economies in a number of countries are handicapped by
inflexible labour practices and inadequate educational and
training provision, making new investment less
attractive.
Consequently, although these countries are undoubtedly
benefiting in aggregate terms from the new conditions,
these benefits are tending to be distributed unevenly, and
an increasingly large, predominantly unskilled, section of
their societies is becoming marginalised.
At the same time, many of these states, particularly those
in Western Europe, are finding it harder to finance
adequately the welfare services which represented the
basis of the social contract with their societies during
the post war period. This raises the prospect of a
backlash against globalization which may squander the
opportunities offered by it.
21. The first step in addressing this situation must be
for the political leaders of developed economies to
refrain from using competition from low wage economies as
a scapegoat for their domestic problems. There is
currently insufficient data to support the purported
connection between competition from low wage economies and
rising inequality and unemployment in the developed world.
Indeed, the general correspondence between wage levels and
productivity levels suggests that such a connection is
unlikely to materialise in a majority of economic sectors.
Developed world problems should be seen first and foremost
as products of developed world conditions.
22. The central task which confronts these states is
therefore, not to protect their economies from low wage
competition, but rather to raise productivity levels ahead
of wage levels. Only if productivity levels can be so
raised will developed economies regain their
competitiveness. This implies:
(i) An effort to restructure labour markets in order to
create a more flexible system of employment practices.
(ii) An attempt to enhance basic educational and
vocational training capabilities, particularly in the use
of new technologies.
23. At the same time, however, there should be an effort
to alleviate some of the worst consequences of the
transition, offset the rising inequalities between skilled
and unskilled labour within developed countries, and
mitigate the shift in power which is occurring between
increasingly mobile capital and largely static labour.
Governments must provide both a safety net for those left
unemployed by this shift, and retraining opportunities to
enable them to re-enter the job market.
24. It is essential that these measures be placed into a
broader context of an effort to build a new industrial
democracy, based on social understanding and the fostering
of consensus. The social contract which has underlain the
advanced industrial democracies for the last fifty years
needs to be redesigned to accommodate the changed
circumstances produced by the process of globalization.
Some form of contract is not merely an essential bulwark
against extremist reactions to globalization, but also an
essential foundation of a continuation of consensual
politics in those countries. The counterpart to demanding
responsible wage settlement on the part of labour, for
instance, must be a recognition of the responsibility to
support those adversely affected by the process of
globalization on the part of the state.
Conclusion
25. It must be noted, by way of conclusion, that it is
ultimately impossible to consider the economic issues
posed by globalization in isolation from the broader
geopolitical context in which they rest. If we are to take
advantage of the opportunities of globalisation, a
relatively stable strategic environment is an essential
precondition.
Yet this is by no means as secure as much of the
triumphalism associated with the end of the Cold War would
seem to suggest. In many regions of the world, such as the
former Soviet Union, Balkans, Middle East, Indian
Sub-continent, and East Asia, there remains a potential
for conflict which, if allowed to develop unchecked, could
have serious implications for our chances of meeting the
challenge of globalisation.
It would therefore seem essential that the structure of
economic governance proposed here be supplemented by an
enhanced structure of security governance. The precise
shape which such a structure might take is beyond the
scope of this working group, involving, as it would, the
future of the United Nations and the Security Council, the
relationship of NATO with Russia, the settlement of the
Middle East, and other regional problems. But we are clear
that there is a need for urgent consultation and
cooperation to enhance stability in these parts of the
world.