... The financial markets are truly global. I mean, people talk a lot about
globalization, but the place that globalization has really taken place so far
is only in the financial markets. Those are the places where traders move money
to every corner of the world and move it out again, second to second, all the
time. Of course, there's a great opportunity here in the sense that markets
that were once invisible or only received public sector money are now able to
compete to attract capital. This led to the emerging markets phenomenon to a
large extent because every trader, every Wall Street guy, views the world
through that window on his desk. That's his computer screen. And now, if you're
visible through that window, you're competing. Those who are not, still are
You've written about a dual constituency that ... leaders of countries must
deal with. Talk to me about that.
Well, the growth of a global economy has produced a very interesting tension.
If you're leading a country anywhere in the world, you have to respond to the
demands of the electorate that put you into office, and they are one group to
which you are beholden. But there is also this group, these 30,000 traders and
the people who are managing funds and the people who are running money around
the world, who are conducting a minute-to-minute referendum on your policies,
and they can pull money out of your country overnight.If you lose their confidence, they can make it impossible for you to advance
your programs at home. They have different interests than the constituency that
elected you. Their interests are short term. They're driven by their bonus
cycles. They're driven by how the returns from your country figure versus the
returns from everywhere else in the world. They are not looking at whether or
not your people are doing better or whether opportunity is being created or
whether you're creating a more socially just society and that's a problem.
On the other hand, they do demand that you play by the rules in the
marketplace. They do demand that you're open. They do demand reform and
liberalization, and that's a positive thing. So ideally the tension between
people who see government as a means of creating a more just society, and
markets which see governments as having the responsibility to create open
markets, can be a good one because it can produce a world that functions better
and ultimately creates more opportunities.
The problem is when you get into a kind of dialectic between the one and the
other, and you swing from populism to liberalism and reform, and then react
against that and go back again. Then you get into the one-step-forward,
two-steps-back phenomenon, and there's a tension on that going on right now.
I mean, there are some countries ... Venezuela has a new president who's a
populist, and it looks like he may be reacting against much of what's going on
in the markets. In Russia, it's quite possible that you'll get the emergence of
populist leaders who will react against what's going on in the markets. The
voices of the markets, like the IMF, have become the villains of the markets.
If you go to Korea right now and you talk to them about the bad year they've
just gone through, they refer to it as the IMF time, so it's being used by
local politicians to their advantage, and this dynamic, I think, is going to be
the defining dynamic in sort of the new global politics.
But isn't it true that the IMF and the U.S. Treasury have insisted on
policies that aren't politically sustainable in lots of these countries?
... I think that there were certainly many instances where the reforms
advocated by the IMF, where the reforms pushed for by many in the financial
community, where the policy position known by the term the "Washington
consensus" was very insensitive to the needs of the people in these countries,
and thus it became politically unsustainable. Because if what you're doing is
saying, "Strong currency at any cost," then what you're going to find yourself
in is a situation where sometimes you're forced to raise interest rates so high
that you bring a recession onto a country. You know in a lot of these
countries--look at Brazil--the gap between the top fifth and the bottom fifth
is as extreme as anywhere in the world. If you liberalize there's an incentive
for the elites in these societies to globalize, plug in, benefit themselves,
buy a new BMW, read the Financial Times every morning but, on the other
hand, encourage labor rates to stay low because one of the comparative
advantages that they've got in these countries is having low-cost labor.
... And I think it behooves the financial community to realize that unless they
come up with policies that are socially just, that deal with issues of social
equity, then they will not be coming up with approaches that are sustainable
and they will get into this swing back and forth, and they will ultimately hurt
themselves economically. So there are very pragmatic reasons to do the right
Do you see any signs that the financial community is beginning to wake up to
what you just said?
Absolutely. I mean, there's a debate going on. The Washington consensus has
been put on a shelf. There is a new thought that something that is more
politically sustainable is needed. People have read leading thinkers on these
subjects, whether it's at the World Bank or Jeff Sachs at Harvard or Paul
Krugman or others who have said, "Hey, wait a minute. Let's reconsider this.
There are national interests to address in some of these countries." The result
of that has been [a] calibration, and inevitably it will produce a Washington
consensus, too, or better yet some consensus that is not so closely associated
with the capital of the First World. It has a little bit more components of
reflecting the needs of people in each one of these markets.
... There are going to be ups and downs, and this gives people a chance to
adjust. And I think, also, while there are many places in the world that this
economic crisis has caused enormous pain and a pain that really requires an
effort to adjust, because we're talking about hundreds of millions of people,
at the same time we're talking globally about a change in economic growth of a
couple of points.
It's not a global depression. In Indonesia, it's a depression, but globally
we're talking about an adjustment, and that's the time to react this way.
That's the time to have this debate, responding properly to these things. As
has been learned in many of these countries, you can avoid the worst, learn
from your mistakes, and come out with a better formula. So, in many respects,
this has been quite healthy ...
What you're basically saying is in this new world the markets are in charge
They can't be in charge. The markets have enormous power. Governments have got
to realize that their goal is to strike a balance where markets can be an
engine for growth, to get out of the way and let them be an engine for growth.
But to build the safety systems in their societies that allow them to react to
markets overstepping, to allow them to react to the fact that markets don't
have conscience or vision and don't take into account social justice as an
issue. But it's analogous to the situation in a society where you want to have
a free society and you want people to be able to do as much as they can based
on their own free will, but you have to set certain limitations.
... But, also, governments are going to set the priorities for how their
countries are going to grow. They have to decide whether they want a system
that brings that bottom fifth up. They have to decide how they're going to use
the human capital, which is a crucial component in these equations. The new
technologies that have linked together the markets of the world can also be
used to link together educators and students. They can be used to build the
knowledge resource so that the gross knowledge product of a country can grow in
the same way that the gross domestic product of a country can grow. That is the
kind of job that only a government can provide and that has to be figured into
It's in the interest of the markets in the long run, too, because they end up
with value-added producers. They end up with people who are not just simply
fruit pickers or miners or people dealing in the kind of single-resource
commodities that have defined many of the economies of these countries. So
governments are there to provide for the greater good, and they need to allow
markets to do what they can to provide for that, and they need to be the
One of the things that strikes me as an absurdity in this conversation is when
you have hedge funds and other players in the global markets saying we'll be
self-regulating. These guys would never think of walking out of their plush
office down into the street and getting into a self-regulating taxi cab, and
they certainly wouldn't use the toothpaste of a self-regulating drug
manufacturer. So why is it that they think that somehow they are going to be so
public-spirited that they should be allowed to do this? The answer is they
can't be. Markets can't be self-regulating. Governments shouldn't
over-regulate, but there's a role to play.
In retrospect ... did we push these countries too hard to open up too
No, I don't think so. I think that the push was needed. What's happened in
these countries in the past few years has been enormously beneficial. While
many of them have gone through a rough year, they've gone through nine or more
very good years, and many of them because of these policies are reacting in
sounder ways. When Mexico had a crisis it didn't close its borders; it kept
them open. It didn't choose public spending in a crazy way; it maintained
austerity. For much of the Mexican economy there has been recovery, although
there's a long way to go for a segment of the Mexican economy.
But in the wake of this crisis in places in Latin America like Chile, Argentina
and Brazil in the past few weeks and months you've seen sound steps based on
what they've learned during this period allowing them to recover more quickly.
The same is true in Korea; the same is true in Thailand; the same is true with
steps the Chinese government has taken to keep themselves from being drawn into
this too much. We'll see whether they're successful or not. I'm not sure that
they will be ... In some countries we haven't seen it. In Russia we certainly
haven't seen it.
It's premature to point to Mexico as a success story in the sense that yes, the
financial markets recovered more or less, although ... we can't say that
recovery is complete until the financial system is robust again and until those
people have started to see their lives improving as a consequence of all of
this, and until that happens Mexico is still vulnerable ... .
You know, this crisis was not a crisis of fundamentals; this was a crisis of
confidence. In many of these places things in a different mind set in the
marketplace could have gone on okay. But what happens in a crisis of confidence
is that when there is a misstep in one place, the markets start having to look
for capital to cover margins and stuff like that from elsewhere. The places
that they look or where they think maybe there's going to be a problem in the
future, and a lot of that's based on the confidence that has been engendered by
the government's policies there. So the Brazilians had this very unusual
experience of watching Boris Yeltsin go to bed drunk and having them wake up in
the morning with a hangover. So this is a phenomenon in this marketplace.
Was any of that predictable at the time that we were pushing these places to
open up all of their financial marketplaces?
Many of these problems were predicted. I mean, people knew Thailand was in bad
shape before Thailand tanked. People knew that there was a lot of money going
back into these markets and that it could leave overnight ... I was going out
giving speeches saying, "Beware, you are likely to have another emerging
markets crisis a year," before this thing happened. Certainly, anybody with
half a brain and a calculator could have figured out that Russia was going
But a lot of people were also making 100% and 150% interest rates on
Russia's short-term debt.
When you're making 150% interest rates, you get what you get. I mean, the
upside is great. The reason that the upside is great is because the risk is
great, and you play with fire and you're going to get burned.
You were engaged in the so-called hype. Tell me a little more about
Yeah, well, at the beginning of the administration, we did identify these 10
large emerging markets that we felt were enormous opportunities for U.S. export
growth. And, indeed, not only were they; they are. The fact of the matter is
the 10 largest emerging markets will be more important export markets for the
United States than Europe and Japan combined.
So if you see exports as the key creator of U.S. jobs or a key creator of U.S.
jobs, which they are, and you see them as important to the U.S. economy, then
targeting these markets is the right thing to do. At the same time, if you see
the markets are having strategic importance, then finding common ground and
common sense of issues, helping them by bringing investors--because bringing
investors brings exports to the United States. There's a direct correlation
between investing and exporting. All these things are in our interests ... It's
the right policy for now. Backing away at the first sign of crisis doesn't make
any sense ...
So if there was a little bit of hype to change people's focus ... and to get
them to sit up and pay attention, I think in the end it was worth it because we
can't look away and, guess what, people aren't looking away. You could just as
easily write a newspaper story today called, "The Emerging Market Boom" and
people would be surprised and they would say, "Well, wait a minute, I thought
they were all going through a hard time." But in many of these markets last
year, foreign direct investment was up and foreign direct investment is to
portfolio investment as marriage is to one-night stand.
I mean, portfolio investment comes in and goes up. Foreign direct investment
stays there. That's the kind that you want to have. That's the kind of building
factories and plants and infrastructure that transforms a country permanently.
And that's still growing. Why? Because the power companies and the telecom
companies, the automobile companies, the energy companies realize that these
are the places they're going to have to be for a long time to come. So that's
the bedrock of these economies, and that bedrock is strengthening, not
During these early discussions and the decisions to open the markets for
exports, the trade markets, where did the push to open the financial markets
come from? What role did Treasury play in all of that?
Well, first of all, the financial markets opened because of the markets.
Governments were always very limited in all of this. We did a lot of stuff
promoting big emerging markets ... [But] we have to view government, actually,
as a lagging indicator. The United States government did not declare China a
big emerging market. China's big, it's emerging, and it's a market. I mean, the
fact that the government finally got around to realizing it probably should
have been a sign to people that things were going to change soon.
This is true with a lot of things in these markets. Convergence happens to
standards because the guys with the money want to know how much a company is
making. They want generally accepted accounting practices. They want to know
how the government is managing a tax regime. So this kind of thing was driven
by the markets and abated by government and not the other way around.
But isn't it true that the U.S. government was making it a condition of
membership in various international organizations ... that they get rid of any
controls that they themselves had on the flow of capital?
... Right. So what? ... That's a good thing. We saw it in our interest, as it
was, to liberalize markets, to get these countries to plug in better, to get
capital to flow in. It's in the interest of these markets for capital to flow
in, and to make that a condition for entry into these clubs that these
countries wanted to join is a sensible, responsible thing.
The problem comes when you push too hard regarding subsets of these issues,
like protecting a currency at all costs or allowing capital to flow in on a
completely unregulated basis, which just doesn't make sense for a lot of these
small economies, and it isn't socially just. You need to find a third way.
You ... [have] compared global economics to plate tectonics. Would you tell
me a little bit about that?
... when you look at the global economy, one way to view it is using a plate
tectonic model where there are fault lines all the way around. When there's a
shift of one of these fault lines, particularly a big shift, it can be felt all
the way around the world and we saw that last summer.
There was a fault line underneath the Russian economy. It shifted. The impact
was on Brazil where there was another fault line which shifted and caused a
problem throughout Latin America. You saw that with the Asian financial crisis
where there were fault lines under a number of these economies that we reset
into disequilibrium as a result of too much capital and too many
foreign-denominated loans coming in while currencies were valued wrong ...
Well, that fault line moved and what happened? Demand fell off enormously, and
that's how the energy was passed through this system of economic plate
tectonics, if you will, and it affected the countries of Latin America. Why?
Because most of them export commodities--40% of Chile's exports is copper, and
40% of their exports goes to Asia. So at that time all of a sudden you've got a
consequence in Chile.
Even to this day there are fault lines that could shift and could set off
another set of these things. Wall Street with an Internet bubble in the middle
of it is a fault line. Japan with a weak financial system and uncertainty about
whether the government's latest round of reforms, after round after round of
reforms over the course of the past decade, are going to work is another fault
line. China, with the value of the yuan and whether they're going to devalue,
is another fault line. A spreading war in Kosovo, a conflict in the Middle East
near the source of oil, these are fault lines that exist out there. We have to
recognize that in the global financial system right now these aren't isolated,
these aren't remote from us. They can affect us and they can affect other
markets in a fairly immediate way.
So you don't think that this rolling crisis is over?
... Personally, I'm a little worried because I think there is a bubble in the
middle of the Wall Street economy. No one should have any confidence in the
Japanese ability to fix their problems because they haven't been able to do it
so far and they haven't taken sufficiently dramatic steps, although they may.
The Chinese could be spooked by a variety of other things and need exports to
produce hard currency ... We are still in an era or period in which confidence
is not restored, and until it is restored, until there is a deep sense that
we're back on the upward track, we stand vulnerable to upsets like the upsets
we've seen in the past year.
Is there a danger that the wrong lessons are being drawn from the crisis of
the last year and a half, two years?
... Not only is there a danger, there's a certainty that the wrong lessons are
being drawn by some people. By most of the people at the center of the
international financial system, are the wrong lessons being drawn? I don't
know. I don't see the IMF being highly responsive to this. I don't see it
having learned its lessons. I see that lending $5 billion more to Russia seems
to me to be at best an accounting transaction, at worst another waste of money.
I see still an absence to be able to address questions of social equity in an
effective way, and so these things will take a while to formulate, but the
general trend within the markets is to be fairly thoughtful about this at the
highest levels, and there is a general movement toward understanding things
Part of the problem is that in emerging markets, just as some of them are not
highly liquid financial markets, they are not highly liquid information
markets, and as a result a little bad information can cause quite an upset just
as an inflow of too much money or an outflow of too much money can cause quite
an upset of these markets.
So they're still volatile? They're still erratic?
Volatility is the toughest issue to deal with because the pipelines are getting
bigger and bigger through which money goes. It allows it to go in quickly. It
allows it to go out quickly. The amount of information people have allows them
to make decisions very quickly. The mentality of a lot of these investors is
not a long-term mentality in terms of the portfolio investors, and volatility
is a big risk for a lot of these places. That's why you'll see some kind of
modified capital controls in a lot of these countries growing even though that
has not been for a long time the policy of international financial
It's just inevitable in a medium- and a small-sized country that they want to
protect themselves against that kind of disequilibrium. You will always see
greed and self-interest drive markets to places that reason wouldn't.