7/9/02

WORLD ECONOMY ON THE WANE?

By Lawrence Summers

Lawrence Summers, the former U.S. secretary of the Treasury, spoke with Moises Naim of Foreign Policy magazine.


GLOBAL ECONOMIC VIEWPOINT: During the late 1990s, you often remarked that the United States was the sole working engine of the global economy, and that other regions -- Europe, Japan and the rest of Asia -- were not functioning as well. Is that still the case?

LAWRENCE SUMMERS: I didn't think the world economy could fly indefinitely on a single American engine. The last year has seen that warning borne out. We did not head toward strength; rather, the economy declined in the United States, Japan and Europe.

GEV: How long can the United States play the role of consumer of last resort for countries trying to export their way out of crises or stagnation? Put another way, when does the U.S. external deficit stop being a sign of strength and become a cause of concern?

SUMMERS: It's much better to live in a country that capital is trying to get into, like the United States, than a country that capital is trying to get out of, like many others. And unlike the widening deficit in the 1980s, the current U.S. deficit has been driven, to a substantial extent, by investment demand. Clearly there are questions of how sustainable that deficit is, and there are different paths of adjustment. One involves the United States slowing its economy and importing less. That seems much less healthy for the world economy than an adjustment path involving more rapid growth in the United States, Britain, Europe and Asia.

GEV: Apprehensions about the current account deficit seem to draw on the volatility and fickleness of investor sentiments. Don't you worry that once we begin to see lots of reports, editorials and then warning signals that the U.S. dollar is overvalued and the deficit is not sustainable, a very sharp, sudden weakening of the U.S. dollar vis-a-vis other currencies might take place?

SUMMERS: These concerns were on our minds when I was in government and are perhaps even more relevant now. On the other hand, if you sell dollars, you have to buy something, and at this juncture it is not easy to see the major attraction of either the European or Japanese currency.

GEV: Almost every week we see editorials and articles calling for Japan to move forward on economic reforms and clean up its banking system. Assume that Japan will crash and that its collapse will fulfill a worst-case scenario. How and where would the shock waves travel?

SUMMERS: I'm reluctant to try to reel out economic horror flicks. What I would say is that there are real risks if reflation and growth in Japan are not achieved. The reverberations of similar events in Russia in 1998 and in Thailand and Indonesia in 1997 have shown that predicting the financial repercussions of a crash is very difficult.

GEV: One school of thought says that Japan's problems are political -- that it has a political dynamic that makes needed economic reforms very difficult to implement. On the other hand, Japanese politicians say that economists themselves can't agree on what needs to be done, and that for every prescription from a distinguished economist, you have another contradicting prescription from another equally respected economist. Who's right?

SUMMERS: I think there's merit in both views. A three-pronged program of reflation and more expansionary monetary policy, greater efforts to disclose and work through problems in the banking system, and more aggressive deregulatory measures to make Japan more hospitable to foreign investment would probably command the support of most thoughtful experts. There are major structural problems in the Japanese financial system, but no country has a financial system sufficiently robust to withstand five years of deflation without all kinds of performance problems. In fact, in thinking about Japan's situation, it's important to emphasize the emergence of deflation. Those who frame their critique largely in terms of Japanese structural problems miss important aspects of the situation.

GEV: You reportedly once warned senior Japanese officials that they risked being remembered as the Herbert Hoovers of the 1990s, plunging the country and the world into a great depression through their own obstinacy. In contrast, Paul O'Neill, the Bush administration's Treasury secretary, has insisted that he would not lecture the Japanese, saying that it would be better for them to be left alone to find their own way to deal with their problems. What's your view of that approach?

SUMMERS: I don't remember ever having expressed myself, and certainly not in public, in the language that you attributed to me, but certainly I did encourage the Japanese to take expansionary measures. And you only have to read the newspapers to see how, after its initial statements, the current administration has made a number of explicit suggestions regarding Japanese monetary policy and macroeconomic issues.

GEV: What about Europe, the third engine that is not working up to its potential? In a November 1998 speech, you cautioned that the success of the European Monetary Union would depend largely on the European Union's ability to move forward with structural reforms, including making it easier to hire or fire workers. Has Europe begun to address those challenges?

SUMMERS: I think they've begun, but I haven't seen the kind of significant change necessary to create the virtuous circle -- increased hiring, increased confidence, increased mobility -- that is important to economic success. That lack of progress has complicated the management of the euro, especially relative to the hopes that many European officials had of making Europe more of a magnet for inward investment.

GEV: What if the euro becomes a significant reserve currency alongside the dollar?

SUMMERS: You know, before the euro was introduced, people always expressed two concerns: one, that it would be a strong currency that would threaten the dollar as a reserve currency; the other, that it would be a weak currency that would work adversely to U.S. trade interests by making European exports cheaper. In the run-up to the euro, I would say the greater concern was that it would be threatening to the dollar. As events have played out, it seems to me the second concern is the greater, and I think that as long as we manage our own affairs well, the buck stops here as far as the dollar is concerned.

GEV: You have described yourself as a ''market-oriented progressive'' -- that is, someone who believes in market forces as well as an activist role for government. But some would argue that deregulatory pressures, electronic commerce, the proliferation of tax havens, the harmonization of tax policies and other aspects of globalization pose inherent conflicts to raising the taxes needed to create effective social safety nets. In other words, the more you integrate with the rest of the world, the less ability or freedom governments have to be activist. Do you see that dilemma?

SUMMERS: I see a kind of trilemma among international integration, national sovereignty and public purpose. By that I mean the mobility of goods, services, capital, ideas; the ability of countries to make their own decisions on crucial policies affecting their citizens; and the ability to pursue objectives that the market doesn't naturally generate, such as the redistribution of income or regulations on the environment and labor. You can combine any two of these, but not three. (Economist) Milton Friedman would favor international integration and national sovereignty, and if that led to a race to the bottom in redistribution and regulation, so be it. (Ultra-conservative) Pat Buchanan reconciles national sovereignty and public purpose by opposing international integration. And certain academics favor public purpose and international integration by advocating more and more governance at the global level, through global environmental standards, or global labor standards, or a global compact for redistribution. The real challenge of managing globalization is finding the right kinds of balances among these three challenges.

GEV: In that light, what is your view of the so-called Tobin tax: the idea of taxing international financial transactions and using the money generated to fund different initiatives, from debt relief to supporting the United Nations?

SUMMERS: I don't think it's an idea that will go very far, for at least two reasons. First, although I would like to see more resources devoted to international organizations, foreign assistance, debt relief, post-conflict reconstruction, global education or environmental priorities, it will be a very long time before the countries of the world are prepared to give a taxing authority to an international organization at the global level -- of any kind. Second, while it is tempting to tax what often is seen as speculative activity, evidence suggests that in a world of derivatives, swap instruments and substantial transactions that take place within individual companies, the imposition of an across-the-board tax on financial transactions is neither meaningful nor feasible.


(c) 2002, Foreign Policy/GEV. Distributed by Los Angeles Times Syndicate International, a division of Tribune Media Services.
For immediate release (Distributed 7/9/02)

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