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
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
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
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)