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almost never sued sovereign states in the event of a ishing defaulting debtors failed. For today’s creditors, default. For another, bonds were often collateralized the appeal of defection is stronger, and the appeal of or implicitly backed by tangible assets or tax rev- coordination weaker, than in the past. The challenges enues: creditors were therefore motivated to act faced by a modern version of a creditor association together to seize the collateral (trading their debt, for would thus be commensurately greater today than example, for equity in such valuable entities as rail- they were for its predecessors. roads) or even to administer and collect some of the defaulting government’s tax revenues. Eyes on the U.S. economy Individual bondholders numbered in the hundreds Fiscal stimulus? The panel “Fiscal Stimulus 2003” was rather than in the tens of thousands, although mutual convened hurriedly when former U.S. Treasury funds were less prominent than they are today. Secretary Paul O’Neill canceled his scheduled address. Paolo Mauro Moreover, the CFB had close ties with the British In his place, economists Alan Auerbach (University of government, and, in a few extreme cases, it persuaded California, Berkeley), Eric Engkin (American the British government to resort to diplomatic or Enterprise Institute), Robert Hall (Stanford even military intervention when other means of pun- University), Matthew Shapiro (University of Toward “better and fairer globalization” Citigroup Vice Chair and former IMF First Deputy increased among the average income levels of different Managing Director Stanley Fischer delivered the 2003 countries while possibly decreasing among all individuals in Richard T. Ely Lecture, “Globalization and Its Challenges,” the world. On average, social indicators including literacy during the American Economic Association meetings. In it, and health have improved significantly in the developing he recounted the benefits of globalization—including countries. It thus appears that, on average, conditions in the improved growth—but also acknowledged that many of the developing world have improved. But, Fischer emphasized, problems critics point to are real. He highlighted a number of this is not the same as saying that everyone in the developing policies that are necessary to achieve a “better and fairer glob- countries is doing better. alization.” In his opening remarks, he also paid tribute to his Trends in global poverty figure prominently in the global- friend and colleague Rudiger Dornbusch, who passed away ization debate. But the facts alone do not, Fischer noted, in July 2002 and was to have delivered the Ely Lecture. directly address the issue of whether the trends are caused by For the full text of the lecture, see www.iie.com/fischer. developing countries’ increasing integration with the global economy. To address this question, we must assess the Almost everyone agrees that the world could be a better Fischer: “The pro- impact of openness on growth. market, pro- place and recognizes that much work will be required to Trade policy is a central aspect of economic policy. Many globalization improve it. Why, then, is so much of the globalization studies have shown that greater openness to trade is associ- approach is the debate about whether the world is getting better or worse? ated either with higher levels of income or with more rapid worst economic The reason, Fischer said, is that this debate is ultimately growth. And countries that have adopted export promotion policy, except for about policies. “The implicit premise is that if the world is strategies have achieved greater economic success than those all the others that going to hell, then the policies of the past 50 years are likely that have sought to keep imports out. The evidence and the have been tried.” to be wrong and if the world has been getting better, then studies, he observed, should persuade many that openness to the policies are more likely to be right.” It is a separate ques- the global economy is a necessary, though not sufficient, tion, he argued, whether all recent developments in global condition for sustained growth. conditions can be attributed to globalization. A set of policy recommendations for reform-minded Regional challenges countries that has received much attention and a large Clearly, the major challenge facing the world today, Fischer share of negative press is the so-called Washington consen- said, is poverty. And the surest route out of poverty is eco- sus set out by economist John Williamson in 1990. Fischer nomic growth. Growth requires good economic policies set regarded its 10 elements—which included fiscal discipline, in a policy framework that prominently includes an orien- tax reform, financial and trade liberalization, deregulation, tation toward integration with the global economy. A way and privatization—as a useful shorthand description of must be found to make the global system deliver economic part of a desirable policy orientation. growth more consistently and more equitably. Global growth is determined mainly by the performance What do the data show? of the industrial countries, and attitudes toward globaliza- Globally, poverty rates have been declining, especially in Asia, tion in these countries are key to the future of the global Fischer noted. Developments in income distribution are economy. Governments in these countries should stand up January 20, 2003 more mixed, with the evidence showing that inequality has and support the right policies; help their own people deal 6 ©International Monetary Fund. Not for Redistribution Michigan), and Janet Yellen (University of California, cause this recession (U.S. recessions typically occur Berkeley, and former chair of the U.S. Council of after the Fed tightens monetary policy), the country Economic Advisers, 1997–99) debated whether stim- had price stability, and there was no liquidity trap. ulus was warranted at this juncture and what form it But, in her view, the call on whether the U.S. econ- should and would take. omy had emerged from recession was “too close for Auerbach and Engkin argued that the recession, a comfort,” and the Fed had few tools left in its arse- historically mild one, was effectively over; Hall, nal—most of them virtually untried. Shapiro, and Yellen were not so confident. Hall and A discussion of what to do quickly turned to what Yellen expressed concern about unemployment, and not to do. There was universal unease with the coun- Shapiro cited intangibles—the impact of a war with try’s fiscal position, which had deteriorated rapidly in Iraq and a possible asset market meltdown. For Hall, recent years and was looking grim going into the fiscal policy also lent a welcome added dimension to longer term. Auerbach admitted to being “totally puz- Robert Hall a U.S. economic policy framework heavily reliant on zled” by a stimulus package fashioned around a per- monetary policy. Yellen termed the U.S. economy manent cut in dividend taxation (it would, he said, “abnormally fragile.” She noted that the Fed did not “stimulate private wealth—nothing else”). He pre- with the adverse consequences of economic change; and economy, Fischer said. But, national economic, social, and deliver on their promises on trade, aid, and the strengthening cultural preferences are bound to take a front seat in this of the international economic system. area. Moreover, greater clarity is needed on the economic Although most of the world’s poor are moving toward effects of alternative policies—an area in which more pub- sustainable growth (notable exceptions are some countries lic policy attention will eventually be focused. in Asia and Latin America), Fischer said that the most pro- Improving governance. Ordinary people everywhere want found problems of poverty were increasingly concentrated to improve their lives. But corrupt governments do not nec- in sub-Saharan Africa. It already has the world’s highest essarily respond to those desires. That is why, Fischer poverty rate, and the number of poor has been rising argued, the trend to democracy is so important. rapidly. In addition, HIV/AIDS is taking a tragic toll. While countries are primarily responsible for their own fates, he said, outsiders—from both the public and the pri- National and global policy challenges vate sector—can influence outcomes by promoting democ- All countries have challenges to surmount if globalization racy, investing in economic activity, and supporting good is to benefit more of the world’s citizens. projects in social sectors. Through their actions, they can Implementing the right policies. The outward-oriented poli- also help fight corruption in developing countries. With a cies described in the 1990 Washington consensus, Fischer nod to Winston Churchill’s famous observation about said, remain an important component of the right approach democracy, Fischer concluded that “the pro-market, pro- to economic policy, but also needed are a greater emphasis globalization approach is the worst economic policy, except on social justice, more effective economic governance, crisis- for all the others that have been tried.” proofing economies, and labor market reforms that allow more of the workforce to enter the formal labor market. Tribute to Rudi Dornbusch Delivering on trade and aid. The industrial countries need “Collaborating with Rudi,” Fischer said of his coauthor on to do their part to facilitate developing countries’ integra- the textbook Macroeconomics,“has given me as much satis- tion with the global economy. That means liberalizing agri- faction as anything else I have done in my professional life.” cultural trade and ending the massive subsidies to agricul- In opening remarks at the Richard T. Ely Lecture, Fischer ture that impede the exports of so many developing coun- paid tribute to Dornbusch’s many contributions to the theo- tries. At the same time, the developing countries can retical and policy fields, from his influential “overshooting” achieve major gains by opening up trade to each other.

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