Speech

THE THEME

In an afterword to the latest edition of his book on globalization, Joseph Stiglitz says that globalization is a fact of life. One might want to take issues with some aspects of the book's analysis-and many have. But Stiglitz makes a persuasive case when he talks about the need for an acceptance of multilateralism if our system of global governance is to work.

Tonight, though, I want to argue that globalization is more than a fact of life. I want to draw attention to the great benefits it has brought us, and to stress the importance of preserving those benefits. I want to emphasize the importance of multilateral trade liberalization at a particularly important juncture. And last, but certainly not least, I want to set out the role that the IMF can play in providing the foundation for sustainable global growth.

I am not seeking to argue that progress is trouble-free; where possible, we should seek to find ways of making it easier for everyone to share the improvement in living standards and overall economic welfare that globalization offers.

But it is important not to throw the baby out with the bath-water. We might not have fully exploited all the benefits that globalization can bring; and we may be able to do better to enable more to gain. That is not, however, a reason to condemn the process.

It is equally important to heed globalization's critics. Failure to engage with them would leave us open to the charge of arrogance and indifference. It would also leave the valid criticisms unconsidered when there may be opportunities for doing even better. Debate is, after all, a vital part of the policy formulation process. Maybe some of those anti-globalization protesters share the instinct of that American wit, Ogden Nash, who said that "progress might have been all right once, but it has gone on far too long".

Some critics of globalization have genuine misgivings about aspects of the process. It is worth looking at how policies can be shaped to maximize the benefits for everybody at a lower cost and to address the critics' legitimate concerns. Successfully doing so would raise economic welfare.

But first, we need to define what we mean by globalization. At its broadest, we are talking about the integration of the world economy. A world benefiting from rapidly falling transport and communications costs, thanks to technological progress, combined with sharply rising trade flows thanks to trade liberalization. These forces have led increasingly to world markets driving down prices to consumers and constituting a major engine of economic growth. 200 years ago, most people lived their entire lives within a very short distance from their birthplaces. Moreover, most of the goods they produced were consumed at home or within a short distance, and most goods consumed by them originated from local producers.

The factors contributing to this much more integrated global network go beyond transport costs and tariffs, important as they have been. Advances in communications technology have been breathtaking. The ability to do business by phone, fax, and e-mail, regardless of location should not be underestimated as a force in the process of globalization. Indeed, the same technological advances have facilitated global protest: those opposed to globalization have not been slow to exploit their ability to communicate and disseminate information rapidly.

And the fact that a new idea, or process, can spread very quickly (witness faxes and email) also means that adjustment to changes must now come more rapidly. The benefits of integration are enormous and also come more quickly, and I shall return to some of them later.

Here, I want to state three simple, but vitally important propositions, that should guide policy makers as they come to grips with the challenges of globalization. First, no country has achieved rapid and sustained growth in living standards without using the international economy and integrating with it. Second, countries wanting to achieve lasting reductions in poverty will be more successful the sounder are their own economic policies and the more rapid their economic growth. And third, for countries with a sound domestic policy framework, poverty reduction and growth will be more rapid the more open is the international economy and the more rapid the growth of trade in goods and services.

We can build safeguards to preserve the benefits of globalization, to lock in the progress made. In some cases these safeguards actually involve the dismantling of barriers-especially trade barriers. History teaches us that prosperity can be undermined by short-sighted, self-interested and, dare I say it, foolish policymakers. Nobody wants to return to the beggar-thy-neighbor policies of the 1930s.

But we can also build safeguards to protect the vulnerable against sudden reversals of fortune as the world undergoes a process of rapid change. External shocks can be more difficult for some countries and individuals to withstand than others. These are issues that we need to continue to address.

We have come a long way: but we must also recognize there is still a long way to go; we must facilitate the process of globalization while finding mechanisms to share its benefits more widely.

GLOBALISATION AS A HISTORICAL PROCESS

I say "we" not because I am among friends this evening-although I like to feel that I am. Nor by my use of the pronoun am I referring to some loose concept of the West, or the industrial world. I say `we' because economic progress has been, with very few exceptions, a truly global experience. Of course, it has been unequal. Prosperity means different things to different people. I would not describe the average citizen of most African countries, or of India, or of China, as prosperous by Australian or American standards.

But in relative terms progress since 1945 has been almost universal. There can be few people who, in terms of their material welfare, would willingly change places with one of their compatriots from sixty years ago. Even allowing for some isolated reversals that have taken place in some of the world's more unstable places in recent years, the figures speak for themselves: life expectancy, infant mortality, absolute poverty-all such indicators show improvement almost everywhere since the end of the second world war.

Globalization is not new, of course. It is not even a phenomenon of the industrial age. We often think of Marco Polo as one of the world's first entrepreneurial traders-though in fact we can go back many centuries before, and find evidence of countries and empires, especially those encircling the Mediterranean, having traded and increased prosperity.

19^th Century Globalization

But the period that has most parallels with today is that of intense industrialization in the nineteenth century. The industrial revolution that had started in Britain in the eighteenth century had spread rapidly across Europe and America. Economic growth seemed spectacular, fuelled by technological advances in transport, communications and production capacity.

Such progress brought dramatic falls in costs. According to O'Rourke and Williamson, it cost 177.5 pence to ship a quarter (eight bushels) of wheat from Chicago to Liverpool in 1868; by 1902, that same shipment would cost barely one fourth of that (46.5 pence). International trade rose dramatically, helped by these falling transport cost as well as tariff reductions. These factors combined to even out many price differences: in 1870, for example, wheat was 58% more expensive in Liverpool than Chicago, but by 1895 the gap had narrowed to only 18%.

And in the latter part of the nineteenth century, capital exports, from Britain in particular, rose sharply, fuelling trade and investment in countries around the world.

The distinguished economic historian Herbert Feis described the city of London as "the greatest free financial force in the world...directed by sober yet daring energy." He cited figures showing that in 1883 just over three and a half per cent of Britain's national income was derived from overseas investments: thirty years later, on the eve of the first world war, that proportion had risen to almost ten per cent. The period was truly one of free capital flows.

The interwar breakdown

The international framework that had encouraged international trade and capital flows and so helped accelerate the transfer of technology was, in large part, wrecked by the aftermath of the first world war. Even before the collapse of confidence at the end of the 1920s, tensions among the industrial countries had hit trade and capital flows.

The depression, of course, brought in its wake the damaging unilateralist policies that Cordell Hull, among others, fought so hard to reverse. Tariffs rose, trade flows contracted, and international capital flows shrank. Protectionists, always masters of self-delusion, blamed these policies on the consequences of economic contraction. The truth is quite the opposite. Curbing the mobility of goods and capital hampered economic recovery and compounded the problems of collapsing investor confidence and mis-guided fiscal and monetary policies. As Ross Garnaut has recently reminded us, even Keynes was susceptible to the temptations of that peculiarly British form of protectionism known as Imperial Preference.

A new golden age

The Great Depression was a wake-up call. Towards the end of World War II, key policymakers, especially in America and Britain, recognized the need for a new framework for the world economy, one aimed at bringing stability to the international financial system and prosperity through a gradual liberalization of trade. The IMF and World Bank were established to help maintain stability by providing assistance to countries in need-in the IMF's case by making it possible for countries to cope with short-term current account difficulties.

Coincident with reform of the international monetary system came trade liberalization. The General Agreement on Tariffs and Trade marked the start of a period of dramatic trade growth, based firmly on the multilateral approach to dismantling tariff and non-tariff barriers. The most favored nation principle was central to this.

The result of putting this policy framework in place was, as we all know, a golden age for much of the world economy. The period from 1946 to 1973 saw growth rates among the major industrial countries that made the achievements of the nineteenth century seem modest. America saw growth averaging 2.4% between 1950 and 1973, Germany 5%, and Japan more than 8%. . Inflation was a little higher than we've recently grown used to-but only a little-while unemployment was much lower than even America has recently managed.

As in the nineteenth century, technology is part of the explanation for the postwar surge in growth. So is the rapidly falling cost of transport and communications. A couple of years ago, a study by two Chicago Fed economists noted that a three minute phone call from New York to London in 1930 had cost $293 in 1998 prices. The authors noted that this had fallen to around $1 for a better quality connection. It's now possible to make the same call for about 30 cents or less. And of course, many of the latest communications technologies-the internet, for instance-have no historical parallel.

Transportation costs have plummeted too. The cost of air freight (as measured by average revenue per ton-kilometer) fell by 78% between 1955 and 1996. That fall, coupled with the increasing importance of high value to weight products such as pharmaceuticals, has encouraged a sharp rise in the importance of air shipments in global trade. Air freight accounted for about 28% of America's international trade in 1998-four times its share in 1965 (and up from virtually zero in 1950).

But the golden age of growth was certainly spurred in great part by the rapid growth of world trade, itself the result of the reduction of tariff and non-tariff barriers: average tariffs on manufactured imports were over 40 percent in l947 and less than 5 percent by the late l990s in the European Union, the United States, and Japan. They had also fallen dramatically in many other countries. At the start of this new century, world trade was worth around $8 trillion-25% of global GDP. That's up from $1.5 trillion, in comparable dollar terms, in 1970, 13% of world GDP.

AUSTRALIA AND THE INTERNATIONAL ECONOMY

We do not have to look far to see quite what an impact trade liberalization can have, and I make no apology for once again referring to Ross Garnaut's analysis. The Whitlam government had made a start on tariff reduction in the 1970s. But the work of the Hawke government after 1983 took this much further-and, in the process, took many skeptics by surprise. The cumulative impact was that in a relatively short time Australian trade policy shifted dramatically-rapid reductions on automobile and textile tariffs, the abolition of quantitative quotas on steel imports, the dismantling of exchange controls and the floating of the Australian dollar.

All this was accompanied by the policy of "Open Regionalism"-regional co-operation but without discrimination. This commitment to multilateral liberalization became bipartisan. The Hawke government continued the progress towards free trade in Australia-and played a key role both in the establishment of APEC and in the successful conclusion of the Uruguay round in the 1990s. And its was region-wide. New Zealand shared the philosophical commitment to trade liberalization.

And the result? In the ten years after the 1990-91 recession, Australia was the strongest performing economy of the developed world-for the first time in its history. As average tariff levels halved in the two decades after 1980, employment rose, by 43%. Exports have risen by an average of 8.5% a year for the past ten years.

The policies that benefited Australia also benefited much of the developing world, which also opened trade regimes and liberalized domestic economies. In the past few decades, a larger proportion of the world's population has become better off in terms of quality of life at a faster pace and by a greater margin than ever before. Those regions that have experienced faster growth have shown greater increases in virtually all quality of life indicators.

In East Asia and the Pacific, for instance, infant mortality, for example, declined from 94 per 1000 births in the 1960s to around 39 per 1000 births in the 1990s-a fall of nearly 60%.

In the past decade, literacy rates in the region have continued to improve, to around 90% for men and 80% for women; a pattern matched in the developing world as a whole, where literacy rates are now around 80% for men, and nearly 70% for women.

World poverty has declined. In the five years between 1993 and 1998, the number of people living on less than $1 a day fell by more than 100 million; and the share of the population living in poverty fell from just over 28% to 24%.

And life expectancy has shown astonishing improvement, in a relatively short time. In the developing world as a whole it averages 65 years, up from less than 40 years half a century ago. Even in sub-Saharan Africa, life expectancy had been rising until the effects of bitter regional conflicts and the AIDS epidemic brought about a reversal.

Perhaps most striking of all is the fact that the gap between life expectancy in the developed and the developing world has narrowed, from a gap of 30 years in 1950, to around 10 years today.

People in both developed and developing countries live longer, healthier, happier and more productive lives than anyone could conceive to be possible just a short time ago. One of the challenges of the Doha process is how to maintain the momentum of liberalization and to do it in ways which will enable all, but especially the poor developing countries, to sustain growth.

Of course, progress within the developing world has not been evenly spread. If we were to invite any middle-aged person to return to the year of their birth and then to give them the choice of where they might have been born, the choice might more difficult in the industrial world. Some Europeans might look enviously at the impressive rise in American living standards in their lifetimes and choose to transplant themselves back to 1950s America. For most, though, such a decision would be marginal, and they would probably prefer to stay European: after all, the gap between America and Europe is, in relative terms, quite small.

But what if you were to ask a Korean or an Indian where they would choose to have been born a peasant in, say, 1955? Korea has had its share of economic crises, especially in recent years. But would a Korean whose country in their lifetime had been transformed from a poor rural economy to a successful industrial nation be willing to trade places with an Indian, whose country's economic transformation has, in some senses, barely begun?

Korea's economic boldness, based in significant part on opening to trade, has brought substantial economic rewards. Its per capita income rose roughly tenfold in the four decades from 1950. The example of what we used to call the tiger economies is such that, for all their problems, even countries like India have come to recognize that an open economy can bring far greater economic rewards than a closed, centrally-organized economy that stifles entrepreneurial activity and resists the opportunities afforded by foreign trade.

In the decade that followed the intensification of the reform process in 1991, India enjoyed average annual growth of about 6%, making it one of the fastest growing of all developing economies in the 1990s. Several studies show a significant decline in poverty over the same period—of at least one percentage point a year in terms of the fraction of the population living on less than one dollar a day.

WHY THEN DO THE CRITICS COMPLAIN?

Of course, my analysis begs the question: if globalization is such a good thing, why has it had such a bad press?

A partial explanation is the what the critics have focused on. It is not difficult to identify with those who condemn poverty, child labor, sweatshop factory condition, poor access to education and healthcare, environmental pollution. It is hard to dissent from those who argue that, in an ideal world, nobody would have to live in such circumstances.

Another frequently-heard complaint is that globalization is accompanied by loss of control at the individual level. People feel powerless, for example, in the face of multinational businesses intent on maximizing profit and the impact that the international capital markets can have on national economies.

The inequality that globalization—allegedly—fosters is another of the critics' targets. The benefits are not, they say, universally shared, and this inequality of outcomes is portrayed as the Achilles heel of globalization.

These are powerful grievances, often emotively expressed. But how far do the charges stand up?

I've already argued that globalization has, hitherto, played an important role in reducing poverty. It can continue to do so. But it is important not to be distracted by confusing relative and absolute progress. It makes sense to reflect carefully before condemning conditions in the sweatshop factories in developing countries in absolute terms. The choices confronting someone on the brink of starvation are rather different to someone with money in the bank.

In Vietnam, for instance, the growth of the footwear industry has translated into a five-fold increase in wages in a short period of time. Yes, they are still a pittance in comparison with wage levels in industrial countries. But that is not a relevant comparison here—it is simply not an option in the short-run. What matters is that, however modest in absolute terms, those higher wages have radically improved the lives of those workers and their families.

Child labor is sometimes prevalent in developing countries. It frequently has been in industrializing countries—look, for example, at nineteenth century Britain or America. But that is usually because the alternatives are even worse: starvation or malnutrition, begging, forced early marriages for girls, or prostitution.

As family incomes rise, parents are able to afford the sort of things every parent wants for their children—education, perhaps above all. There is ample evidence that parents in all, including developing, countries choose schooling for their young when they can afford to do so.

Insisting that workers be given a decent wage by industrial country standards would erode the competitive advantages for business using unskilled labor in developing countries. Manufacturers, for instance, would not move around the globe in response to lower operating costs. Developing countries would be unable to exploit their single biggest comparative advantage—lower priced labor. That in turn would deprive them of the opportunity to improve access to education and healthcare for their citizens. And industrial countries would find it more difficult to pursue economic growth through higher value-added activities. Global economic welfare would be lower.

Nor have we done irreparable harm to the environment. The evidence shows quite convincingly that economic growth brings an initial phase of deterioration in some aspects: but that this is followed by a subsequent phase of improvement. The turning point at which people begin choosing to invest in cleaning up and preventing pollution seems to occur at a per capita GDP of about $5000. And, worldwide, it is the richest countries, the most globalized, who are devoting most resources to environmental cleanup and improvement.

What about control? A sense that one is in charge of one's own destiny is clearly an important element in measuring individual satisfaction. But it is poverty itself that deprives people of any control over their lives. Sustained economic growth that translates into rising living standards does far more to give people a sense of control than any alleged harm that multinationals or the fickle flows of foreign capital flows.

There is no doubt that growth reduces poverty. Empirical studies show clearly that the incomes of those at the bottom of the income distribution rise one-for-one with growth. To take one specific example, identifying who lost in absolute terms in Korea during its period of high growth in the 1960s or 1970s is a difficult task. The losers were largely older peasants, and even in their case, their offspring often sent remittances from their urban jobs so that rural living standards were also rising rapidly.

What's more, there is no evidence that globalization has any systematic impact on a country's income inequality. Many countries have experienced fast growth by opening up to the world economy, but without changes in inequality.

At the global level, the news is actually very encouraging. The evidence, though difficult to piece together, suggests that world inequality is declining. This is happening in large part because of the phenomenal growth of China and India. Because the majority of the poor reside in these two countries, their growth helps to reduce inequality of world incomes, even though many smaller countries have had stagnant incomes.

It is tough, though, to alter the income distribution within countries within the context of policies aimed at promoting sustainable economic growth. Domestic concerns about inequality of incomes can be addressed—and very often are—through government policies. Improvements in education and healthcare—both vital ingredients for increasing equality of opportunity—are clearly desirable objectives, since they bring about improvements in individual and collective economic welfare. Ultimately, though, only sustained economic growth can provide the resources needed to deliver such improvements.

MOVING FORWARD

My analysis should not be mistaken for complacency. We cannot rest on our laurels and point to what has already been achieved. So much more needs to be done.

First and foremost, the momentum of trade liberalization must be maintained, for many reasons but importantly to let poor countries embarking on sound economic policies achieve poverty reduction and rising living standards.

This is, as you know, a critical time for the future of the multilateral trading system. The Doha process has been close to deadlock for many months and much rests on next month's Ministerial meeting in Cancun. Trade negotiators have a longstanding reputation for going to the wire at key moments, and I remain hopeful that a solution to many of the blockages will be found.

But the world is now at a crossroads. It can heed the critics of globalization and turn the clock backward, or we can spur the process of liberalization and growth and work to make globalization benefit more. To move forward we need to address remaining problems in the international economy including trade in agriculture and services, and much more. At the moment, achieving a successful outcome to the Doha Round is key.

Hard work can only go so far. Governments around the world need to demonstrate more confidence in the economic philosophy they espouse. In particular they need to show their commitment to free trade is genuine. Of course it is easy, at the abstract level, to accept that the evidence in favor of free trade is indisputable. Australia's recent experience shows that—but so too does the experience of most countries in the past six decades.

Yet once again, there is a stand-off—on several fronts—in global trade negotiations. It is so easy, having accepted the broad principles of free trade, to get caught up with politically sensitive details that make agreement so hard to reach.

In the first instance breaking the major deadlocks in the Doha process is something that, ultimately, only the big industrial countries can do. Whatever can be done to nudge them towards that is of course, useful.

But developing countries have an important, and often overlooked role in moving towards an open, global trading system.

It is worth remembering that good economic policies are unequivocally good. The fewer restrictions on trade there are, the more opportunities countries have to see economic growth accelerate. Trade among developing countries—south-south trade—is still subject to far more restrictions, and higher tariffs, than trade between north and south.

Developing countries need access to the markets of the rich world. But, quite separately, freeing up south-south trade would also bring enormous benefits to the world's poorer countries. Trade flows among developing countries are increasingly important: around 40% of developing country exports currently go to other developing countries.

Poor countries have nothing to lose, and much to gain, by acting to deregulate trade both unilaterally and among themselves. World Bank estimates suggest that by 2015, developing countries stand to gain about $75 billion in real income from unilateral liberalization of merchandise trade by OECD countries. But they would gain something like $120 billion simply by unilateral liberalization themselves. Compare that with official development assistance, flat over the past ten years or so, at around $50-60 billion a year.

Such gains would accrue in large part to those with whom the world is most concerned: the very poor. The World Bank reckons that more rapid economic growth resulting from a global reduction in trade protection could reduce the number of people who live in poverty by as much as 13% by 2015. That is 300 million people.

A sense of perspective

Those are striking numbers, even for those of us persuaded of the benefits of globalization. It can be easy to lose sight of how great the prize on offer is. Yet as a reminder, we only have to look at what great strides have already been made in economic welfare—in the rich countries, of course, but as Heinz Arndt's work helped illuminate in the low income countries, too.

Barriers to trade are also barriers to economic growth: and so in turn are barriers to poverty reduction. We cannot afford to lose the momentum for trade liberalization. But, as the title of my lecture indicates, dismantling barriers is not enough. We need to build safeguards as well, to work to ensure that the benefits of globalization are preserved. Consolidating and enhancing the gains from trade liberalization is important. But it is only part of a broader challenge.

It is essential to tackle institutional factors—what we now term issues of governance. Institutional effectiveness—and stability—is vital to foster economic growth. Institutional credibility is hard to acquire—but easily lost. But significant progress can be made, especially if the potential rewards for reform are clearly visible.

Here too, economic growth can be an important stimulus and form part of a virtuous circle. As countries become more prosperous, and an increasingly comfortable middle class develops, the demand for political representation tends to grow as well. Rising living standards are often accompanied by greater pressure for political accountability.

The figures speak for themselves. According to Freedom House, an independent, non-partisan research organization, the proportion of countries with some form of democratic government has risen from 40% in 1987 to 63% in 2002. 121 of the world's 192 countries are now democracies. The proportion of the world's population that lives in countries defined as "not free" has fallen from 47% in 1972, to 35% in 2002.

But the really striking contrast is in relative economic performance. Freedom House reckons that the total GDP of free countries in 2002 was $26.8 trillion: that of countries classed as not free—with more than a third of the world's population—was only $1.7 trillion.

Economic growth and democracy tend to be a virtuous cycle. In a study published in 1996, Mancur Olson and others showed that lasting democracies tend to have better property and contract rights than other types of regime. Democracies need the rule of law and protection for personal freedom as part of the framework needed to maintain free elections. Olson and his colleagues found empircal evidence to support their hypothesis that property rights are an important component of this legal framework.

As governance improves and democratic processes increase, the demand for better social safety nets to facilitate, not thwart, progress is felt. The demand for education and health, especially for the poor increases, and their provision enables the poor to benefit even more from growth.

To be sure, there are still countries whose economic performance is blighted by poor governance, corruption, and on occasion, civil conflict. As long as these blights exist the outlook for better lives will be bleak. Many of these countries are in Africa. But even there, there is cause for hope.

Several African countries have been successfully negotiating the HIPC debt reduction process, and there are also encouraging signs in the way nearly forty countries, many of them in Africa, have engaged with the IMF's relatively new Poverty Reduction and Growth Strategy. This concessional lending facility is explicitly intended to help focus national budgetary policies on pro-growth, pro-poor policies. Its main features include a focus on broad participation and ownership and a greater emphasis on public sector accountability.

While it is still early days, declining per capita incomes of the past have been replaced with moderately rising ones, and macroeconomic stability has been gaining on the continent, especially in those countries that have embraced policy reform and improved governance. The outcome of the Kenyan election, and the seriousness with which the new government is tackling the country's economic problems, is a symptom of the determination of Africans to address these issues.

THE FUND'S ROLE

The IMF has worked hard in recent years to enable governments to develop and implement the sort of changes that can significantly improve the quality of governance. Low-income countries often lack the resources and the expertise needed to put in place appropriate legal structures, including property and bankruptcy laws for instance, as well as statistical reporting systems and arrangements for monitoring public expenditure. The Fund can provide technical assistance to countries who need help.

We have also worked hard to encourage governments to be more transparent in their policymaking. The transparency taken for granted in the political process in most industrial countries represents a significant cultural shift for many lower-income countries. It helps reinforce the commitment to good governance. It can also play an important part in crisis prevention.

As part of the process of persuasion, the IMF itself has embraced radical reform in this area. The Fund publishes many more of the documents it produces (including, with the agreement of the governments concerned, Article IV surveillance papers, as well as program papers).

Crisis management

As I've said, these are important issues—more so than perhaps we once realized. But they form only part of the IMF's broad role in the globalization process.

That role has not fundamentally changed since the Fund was established nearly sixty years ago. The IMF is, as it always has been, in the business of crisis prevention and resolution. The nature of crises has changed over the years—quite dramatically. And so have the tools that the Fund needs at its disposal. But the objective remains the same: to forestall trouble whenever possible, and to minimize the impact when problems do arise.

It is important to remember, though, that in an important sense this work is a means to an end—and not an end in itself. I think it is worth quoting from the Fund's articles of agreement. They explicitly charge it with facilitating "the expansion and balanced growth of international trade and to contribute thereby to the maintenance of high levels of employment and real income and to the development of productive resources of all members as primary objectives of economic policy".

There can be no doubt that to achieve stable growth there has to be a framework in place which permits—indeed, encourages—the development of sustainable macroeconomic policies and the sustained growth of international trade. The ingredients of an appropriate macroeconomic framework might change over time. As I'll explain in a moment, the Fund has responded to the experience of recent years by re-defining what we mean by sustainable policies. But the fundamental objective of those policies has not changed, as we can see, since the articles of agreement were first drawn up.

The past few years have not been without problems, and some countries have found themselves involved in painful, messy and sudden adjustment. But that said, it is perhaps remarkable how few crises there have been at a particularly difficult period for global economic stability. The collapse in global equity markets, the synchronized downturn in the main economic regions of the world—the first for more than a decade—and, above all, a period of international political tension and uncertainty: these have all brought their own challenges.

Of course, it would be presumptuous—not to mention plain wrong—for the Fund to take credit for the absence of more crises. My point is simply that the IMF is working constantly to do whatever it can to head off trouble. Fund staff do no simply sit around waiting for the next crisis to erupt! It is one of those unfortunate facts of life that when things go well, nobody notices very much—and the Fund's contribution to economic stability is largely ignored.

I said that how the Fund goes about its work has changed over time. In part, that reflects the changing economic climate in which it operates. The international financial system is, in one sense, in a state of constant flux—though that it even more true today than it was when the Bretton Woods institutions were established. Nevertheless, I think there are three clearly identifiable periods during the lifetime of the IMF when the nature of the challenge has needed different responses. I should like to argue that in each case the principal difference has been the nature of capital flows.

1946-73

Look for a moment at the period that I've already characterized as the golden age—the years from 1946 to 1973, when industrial country growth was so impressive by the then historical standards. It truly was an era of rapidly rising prosperity for many. But that did not mean it was all plain sailing—far from it. Those with long memories will recall that, at times, the international financial system seemed in constant crisis, especially after 1960. There were periodic crises in the official gold market, and the devaluation of sterling in 1967 was a major political crisis—one which some saw as the beginning of the end for the fixed exchange rate system set up under Bretton Woods. The French franc was also devalued, twice—in 1958 and 1969—while the German mark was revalued twice, in 1961 and 1969.

Several countries—Britain is the example that most quickly springs to mind—were regular customers of the IMF, relying on Fund loans in short-term balance of payments crises which the Fund had been established to help alleviate. And developing countries, too, had their crises: India in 1958-9 and 1966,Turkey in 1958 and 1970, and Chile in 1958 and 1964, to name just a few.

But the distinguishing feature of these crises was that they were current account crises. These were often caused by macroeconomic policies that were inconsistent with a fixed exchange rate, or by a marked deterioration in terms of trade against a backdrop of a restrictive trade regime and few foreign exchange reserves.

Private sector capital flows had largely dried up in the interwar period and capital flows during this first postwar era were largely official in nature: until the 1970s, capital account transactions remained heavily restricted.

1973-85

That changed with the ending of fixed rates which itself coincided with the oil price shock of 1973-74. By January 1974, the price of the benchmark Arabian light crude was 350% higher than it had been twelve months earlier. The oil producing countries were awash with cash that needed a home. "Oil revenues recycling" was born. The period between 1973 to 1985 was characterized by aggressive bank lending to developing countries: and, from 1982, with the consequences of that aggressive lending, the problems of oil importing developing countries unable to repay the debts they had taken on.

It was during this period that developing countries became the IMF's biggest customers: though it is perhaps worth noting en passant that even in 1960, when the IMF had only 68 members, two thirds were developing countries (then known as less industrialized countries).

1985 onwards

But even in the developing country debt crisis of the early 1980s, only about half of the outstanding debt was to private creditors. IMF programs did not differ that much from what had gone before, except that there were now debt rollovers were coordinated with private creditors, mainly the banks.

By the 1990s, private flows had grown so rapidly that sovereign debt to the private sector, mostly bonds, greatly exceeded that to the official sector. The headline crises of the 1990s were capital rather than current account crises.

Capital account crises

Capital account crises have several distinguishing features:

They can occur very rapidly, and can require a much more immediate response than current account crises

They occur because holders of a country's debt lose confidence in its ability to service that debt. This means that, in principle, a crisis can occur even if the country's macroeconomic policies are sound, if it is believed they will not be sustained.

But when there are real doubts about macroeconomic policy, these can translate into a full-blown crisis very rapidly.

Fixed exchange rates—we now know—tend to compound the problem. Doubts about the sustainability of the exchange rate peg can precipitate a crisis just as quickly as doubts about the ability to service debt.

The only effective policy response in such circumstances is to restore investors' belief that a country will be able fully to meet its debt service obligations. That, though, is easier said than done.

The past decade or so has involved a very steep learning curve for economists, both inside and outside the IMF, and governments. How can we detect when a crisis is imminent? How do respond both to warning signals, if we spot them in time, and to crises when they do occur?

What the IMF—and others—have learned about in trying to answer these questions has altered the focus of the way the Fund seeks to forestall crises. There is, for example, much greater emphasis on the overall sustainability of government economic policies. That judgment has to include debt sustainability.

As I implied, the Fund, in common with much academic opinion, has become markedly more skeptical about fixed exchange rates. It became clear during the 1990s that, with open capital accounts, countries can be extremely vulnerable to capital account crises if there is any doubt about either the sustainability of the peg or sustainability of debt servicing. Thus, with a fixed exchange rate there are two major sources of vulnerability: anticipation of exchange rate sustainability, or lack of it; and vulnerabilities arising because of balance-sheet mismatches between foreign-currency denominated liabilities and assets. Today, far fewer countries, especially among emerging market economies, are attempting to maintain fixed exchange rate regimes.

These shifts go hand in hand with the increased emphasis on structural reform and transparency that I referred to earlier.

As a result of these changes in our approach, we believe that the defenses against crises are much stronger than they were during the l990s. Brazil is a good example of the IMF's role in crisis prevention when one appears imminent and when underlying policies appear sound. In mid-2002, Brazil was gearing up for its Presidential election in November. Its macro policies were sound. But investors apparently doubted that these policies would be sustained by the successor government. The IMF support announced at the time of investor uncertainty during the pre-election period committed the new government to maintenance of the fiscal and monetary framework and thus reassured the financial markets. The new government's commitment to sound and sustainable policies has been maintained and markets have to date remained calm. A year ago, the spread on Brazilian bonds was about 2400 basis points—it is now about 800.

But I do not need to tell you that we live in a rapidly-changing world. Sustainable policies are those that bring the prospect of future stability and prosperity—and not those which appeared to hold such promise even in the recent past.

CONCLUSION

How does all this relate to my main theme—globalization? Very closely! I've talked about three discrete periods in the IMF's history when it has stood ready to help countries facing crises—either of their own making or that have resulted from global economic turbulence.

I mentioned the growth rates enjoyed by the industrial countries between 1950 and 1973: impressive by the then historical standards. But those growth rates were just a foretaste of what was to come for the newly industrializing economies, especially in the 1980s and 1990s. Between 1985 and 1994, for example, most of the Asian tiger economies grew by 7%, 8% or more. China averaged GDP growth of more than 10% in that period.

Many of them have experienced considerable economic and sometimes political upheaval. But they also enjoyed spectacular leaps in living standards. By and large, setbacks, however severe they seemed at the time, turned out to be only temporary.

Progress is inevitably uneven. It is sometimes an uncomfortable ride for some countries or some citizens, usually for a short time. The Fund's work in crisis prevention and resolution is intended to help countries cope with the side-effects of progress with as little long-lasting disruption as possible.

It is important to bear in mind in this context, though, that sustained rapid economic growth is simply not feasible without a good macroeconomic policy framework. That must include fiscal responsibility, transparent policymaking, flexible labor markets, credible monetary policy. The IMF can and does help countries to achieve such desirable policy objectives.

Upheaval has always accompanied progress—and dislike, even fear of change, of course, is one of the underlying causes of the anti-globalization protests. But is it really worth sacrificing higher living standards—for everybody, as I've shown—for a quiet life?

Hardly. For decades before the IMF was created, policymakers had sought to find ways of coping with international financial upheaval. Only the most reactionary sought to do this by opposing progress. What the majority wanted was what, eventually, they got when the Bretton Woods conference ended: a mechanism, however imperfect, for helping countries to adjust. That, is fundamentally, what the IMF has always tried to do. And not, whatever the critics say, by diktat, but by persuasion, reasoned argument and, ultimately, consent. Governments do not have to have to accept the IMF's help. They do not have to sign up to IMF programs. They do not have to pursue economic reform. By and large those that do so because they want to exploit the benefits of economic growth. They do so because their citizens want to share the fruits of progress and of sound economic management that they see people in other countries are able to enjoy.

Of course the task of delivering prosperity for all is immense. Much remains to be done—both in terms of trade liberalization and in financial crisis management. At the moment, the critical challenge is ensuring the success of the Doha Round. That in itself will create a more friendly environment for reformers to accelerate growth and enhance social safety nets. I have no doubt that Heinz Arndt would wholeheartedly agree