CHAPTER FOURTEEN

A Declaration of Interdependence

WHEN I BEGAN WORKING on Wall Street, what happened to the global economy outside the United States had little impact on me and my colleagues. At that time, Goldman Sachs, one of the top investment banking firms in New York, did not have a single overseas office. We had some limited business links with the industrialized countries in Europe and with Japan, but we could not even have imagined doing significant business in the developing world.

That seems hard to believe today. One of the most fundamentally important changes I have seen over the course of my career is the vast increase in the links between our country and the rest of the world, including the developing countries. Decades ago, when Treasury Secretaries traveled abroad, they visited London, Paris, Bonn, and Tokyo. In my tenure as Treasury Secretary, among the countries I traveled to were Argentina, Brazil, China, Côte d’Ivoire, India, Indonesia, Mozambique, the Philippines, Ukraine, and Vietnam. As we saw during the Asian crisis, our economic health is more and more affected by what happens in the rest of the globe. Developing economies, which now buy 40 percent of American exports, have become an important part of our world.

In my career, I have been concerned mostly with the economic and financial links that tie our interests to those of other nations. These are still, for the most part, insufficiently appreciated by the American public. Our people badly need a better understanding of the complex phenomena of trade liberalization, the spread of market-based economics, and financial market openness—which are often lumped together under the rubric of globalization. And economic ties are only one aspect of a broader interdependence that is even less well recognized by most people and equally needs better public understanding. All of this should lead, I think, to a deeper realization of how important the economic and social conditions of people around the world are to our own national well-being.

On a business trip to Asia during the summer of 2002, I had a two-hour conversation with Lee Kuan Yew, the Senior Minister of Singapore. I’d gotten to know the Senior Minister somewhat during the Asian financial crisis, when he had demonstrated the enormous depth of his geopolitical understanding and grasp of regional issues. He said that there was as yet no paradigm, of the kind that existed during the Cold War, for understanding militant Islamic fanaticism as a factor in world affairs, and that much of the thinking about the issue was simplistic. I agreed with him that most people didn’t know how to think about terrorism and other geopolitical risks. From my point of view, the question of fanatical religious violence in general and anti-Western terrorism specifically remains bound up with issues of poverty, inequality, and the fact that, even with the dramatic increases in living standards in many parts of the world in recent decades, there remain huge areas of terrible poverty and isolation from the benefits of the modern economy.

To be sure, the relationship between poverty and terrorism is hotly debated and complex. The terrorists behind September 11 came primarily from middle-class families, and experts point to a wide array of factors that have led to the deep anger underlying terrorism. Still, poverty breeds resentment, alienation, and hopelessness, which can foster an environment hospitable to terrorists, such as Afghanistan in the period leading up to the World Trade Center attacks.

In fact, terrorism is only one of the risks we face that have a connection to global poverty. Early in his administration, President Clinton passed around an article by Robert Kaplan entitled “The Coming Anarchy,” which argued that the terrible problems most visible in West Africa—environmental destruction, disease, poverty, and political conflict—were likely to spill across borders, undermining the security of wealthy nations. That led me to read Kaplan’s book The Ends of the Earth: A Journey at the Dawn of the 21st Century, which elaborated the case that the “gated-community approach” to life that I had seen in some developing countries, and even to some extent in New York, was less and less effective in insulating industrial countries from problems in other parts of the world.

Kaplan’s book crystallized a set of thoughts for me that had been developing for a long time about the threat global poverty poses not just to developing countries, but to developed ones. Today, public health hazards have spread rapidly from countries that simply cannot afford even modest medical care for most of their people. Cross-border environmental dangers—such as the loss of biodiversity and contamination of the atmosphere—reach us from countries where most people’s daily struggle for existence precludes any real focus on the environment. In some industrial countries, an influx of immigrants trying to escape from poverty is creating social and political problems. And when states collapse, or dissolve into conflict, the international community tends to become responsible for the massive humanitarian problems that result. There are strong reasons for trying to deal with poverty in poorer countries for the sake of those who live there. But success in bettering conditions in the developing world is also critical to our national self-interest.

Many of those who care deeply about global poverty have expressed great skepticism about globalization and open markets. I believe that what is sometimes framed as a divide between those who care about poverty and supporters of globalization is a false debate. President Clinton’s comment that a strong economy is the best social program also applies to developing countries, where rapid economic growth is critical to raising living standards and lifting people out of poverty. Globalization and market-based economics are central to growth and have contributed greatly to huge increases in living standards for many nations and vast numbers of people.

But as President Clinton also used to say, growth and markets on their own are not enough. Government also needs to put in place policies to promote the broad-based sharing of growth, and to address many important needs that markets by themselves will not deal with adequately. And those measures will, in turn, increase growth by improving the productivity of the workforce. The same is true in the global arena, where poverty and inequality and their attendant social ills remain huge problems—and powerful impediments to productivity and growth. In poor countries, some of the most basic prerequisites for a functioning market economy, such as the rule of law and effective and noncorrupt governments, as well as adequate education, health care, and the like, are too often lacking.

Every time I’ve visited a developing country, I’ve come away with a renewed appreciation of how difficult the problems in such countries can be. Mexico, for instance, had a succession of Presidents and finance ministers, starting in the mid-1980s, who implemented broad-based reform. Largely because of intelligent policy choices, many economic fundamentals in Mexico are sound and the country’s prospects are good. Nevertheless, growth rates have been modest. Too much of the population still has little access to reasonable health care and adequate public education, and public resources to address these problems are insufficient. Beyond that, Mexico faces the challenges of establishing the clear rule of law needed for an effective market-based system, including fighting corruption more effectively. It also needs to encourage a higher savings rate. All of these changes are difficult, not only substantively, but politically.

It was in the context of thinking about inner cities and poverty here in the United States that I first came to focus on the idea of a “parallel agenda.” What this means is that market-based economics and integration with the wider economy, the fundamental policies for growth, should be allied with a “parallel” set of policies to help fulfill the needs that markets will not adequately meet, such as a reasonable social safety net and retraining programs for those workers dislocated by change. Later, as a result of the Mexican and Asian crises, I focused on these issues as they relate to emerging markets. Effective implementation of a parallel agenda in developing nations would promote a broader sharing of the benefits of globalization, which in turn would increase productivity and so advance growth as well as enhance political support for globalization in the developing world.

Despite the gains in living standards of recent decades, the World Bank and most experts estimate that roughly half the world’s population still lives on less than $2 a day, and 20 percent lives on less than $1 a day. Some analysts contend that these numbers overstate the problem, perhaps by as much as half. But even using the more conservative estimates, an enormous and unacceptable number of people are still living in poverty, often without adequate access to clean water, basic health services, and so on—and the greatest benefits of globalization and growth have too often accrued to relatively few. However much progress there has been, it clearly has not been nearly enough.

For many years, it seemed to me that the well-off in developing countries too often viewed these terrible disparities as acceptable. But on trips to a number of developing countries in more recent years, I’ve noted a growing and by now substantial recognition on the part of many business people that they’re not going to have the kinds of economies or societies they want unless they become more effective at dealing with poverty.

There remain enormous uncertainties about how best to come to grips with these problems. In the fall of 2002, some members of my old Treasury team—Larry Summers, David Lipton, Tim Geithner, and Caroline Atkinson—got together at Larry’s house in Cambridge to discuss some of these issues in relation to this book. During a spirited four-hour discussion, it was striking that even as well-versed as all of these people were on the subject, their views sometimes conflicted and they recognized large areas of uncertainty. Most serious-minded experts acknowledge that there’s simply a great deal they don’t yet know about poverty and growth in the developing world. We all agreed that certain factors—such as global integration and market-based economics, at least reasonably effective government, some level of social cohesion, a decent and broad-based education system, basic health care, sound fiscal policy, and a high savings rate—tend to figure prominently in rapid economic progress. What is much less certain is how to encourage countries to pursue the kinds of policies and conditions most strongly correlated with success.

It is also unclear why apparently similar reforms have produced such widely varying results across different countries. And perhaps the most challenging questions involve how to address the needs of the millions of poor people who live in countries with governments that, due to corruption or ineffectiveness, are unlikely to deliver reform. While emerging- market countries—and, for that matter, developed nations—all have less than perfectly effective government and at least some corruption, government that is fundamentally ineffective seems to preclude successful development.

   

BUT WHY DO MANY COUNTRIES that seem to choose sound policies not enjoy the same kind of progress as others? The “success stories” do seem to offer some guidance. One lesson that seems clear is that despite the problems associated with global integration, no economy has managed to grow in a sustained fashion without pursuing integration with the rest of the world, at the very least by promoting exports. In addition, increasing reliance on market forces has been central to improving economic performance. Even in Africa, where economic conditions have been so difficult for the most part, some countries that have embraced market reforms—such as Uganda and Mozambique—have achieved impressive levels of growth and significant improvements in health care and other social indicators.

In Asia, standards of living have grown steadily and in some cases dramatically over the past three or four decades, improving the lives of hundreds of millions of people. South Korea stands as a particularly vivid example: between 1960 and 2000, the country went from around $100 in per capita annual income to around $10,000, due in great measure to some degree of market-based economics, limited liberalization, and a strong export orientation. There were many other factors in the “Asian miracle” beyond freer trade and the integration of global markets. But the kind of growth that countries such as South Korea, Thailand, Malaysia, and Singapore have experienced simply wouldn’t have been possible without elements of globalization.

A counterpoint to this is Latin America, which has had generally disappointing results, growing at relatively slow rates. Even during the reform era of the late 1980s and the 1990s, when most Latin American countries liberalized trade, promoted exports, and relied increasingly on private markets, these nations continued to have low growth rates—with the notable exception of Chile. As Larry said at our Cambridge meeting, Latin America remains something of an enigma for advocates of our approach. Our understanding of the difference between Asian and Latin American growth needs to be vastly improved in order to provide better judgments about development strategies and policies going forward.

Some have suggested cultural explanations for Asia’s relative prosperity. Although this interpretation is in some ways hard to apply to a region that has such heterogeneous cultures, the strongest Asian economies generally have in common such traits as a strong work ethic, a dedication to education, and high savings rates. The success stories in Asia also tend to have less skewed wealth, land, and income distribution than much of Latin America, and many have implemented growth- and productivity-oriented policies and reasonably sound fiscal management over a long period of time. In addition, the foreign minister of one of Latin America’s largest countries once told me that he thought that the difference between these two regions lay largely in the effectiveness of governmental structures and processes in Asia as compared to Latin America, and the comparative political inability in Latin America—despite great strides in recent years—to do enough of what was needed and at the same time maintain sound fiscal conditions.

China is sometimes offered as an example of a thriving closed economic system. In fact, it is the opposite. China’s economic boom began when Deng Xiaoping began moving the country toward exports and market incentives, albeit in the context of state-owned enterprises and a carefully controlled opening to capital flows. This mind-set has taken hold to a remarkable degree—though much still remains to be done to convert China to a true market economy. Every time I’ve visited with people running banks and industrial companies in China, I’ve found that they sound much like their American counterparts when they talk about their businesses—discussing prices, competition, growth, and economic issues. Our view at Treasury was that China could do even better if it opened its markets more quickly to imports as well as promoting exports. And while China did not do that, as it pursued a policy of export-led growth it also slowly opened its own markets to both imports and capital flows, and then took the dramatic step of joining the WTO. India, which is also in the process of transforming itself from a state-dominated to a market-based economy, albeit at a slower rate than China, also grew rapidly during the 1990s.

Sub-Saharan Africa doesn’t fit into any neat category. The problems in most of these countries are momentous. But my trip to Africa as Treasury Secretary left me with the impression that there were also great opportunities. For example, the Finance Minister of Mozambique, where strong economic policies have led to high growth from a low base, explained to me how much could be done with even small amounts of capital. To move forward, Africa needs to develop more effective governments and stronger institutions. The industrial world also needs to focus much more of its attention—and provide adequate resources—to deal with Africa’s special problems.

   

ADDRESSING GLOBAL POVERTY and the dislocations sometimes caused by globalization is an immense moral issue, but is also enormously in America’s national self-interest. Unfortunately, the importance of this endeavor is not reflected in American politics. The American public does not understand the stakes involved, nor do people generally appreciate how little we currently spend relative to the magnitude of the problem.

While at Treasury I was deeply involved in seeking the annual congressional appropriations for certain programs of the World Bank, which uses those contributions from the industrialized countries to fund a wide variety of programs to combat poverty and improve living conditions in the developing countries. This was always an uphill struggle in Congress. After leaving government, I had the opportunity to revisit these issues in a systematic fashion in the context of a United Nations commission on foreign assistance on which I served in 2001. The commission, chaired by former Mexican President Ernesto Zedillo and including representatives from the developed and developing worlds, was intended to draw attention to these issues in connection with a conference held in March 2002 in Monterrey, Mexico, to support increased financial assistance for developing countries.

The Zedillo commission advocated the same basic approach of integrating with the global economy, market-based economics, “parallel agenda” policies to deal with needs markets won’t fulfill, and effective government. But it also focused heavily on what the industrial nations can do to support developing-country growth, the large shortfalls in these areas, and the difficult politics around these issues in the industrialized countries.

The developing countries are heavily dependent on industrial countries’ markets for exports, and those markets are dependent on industrial countries’ growth. Both Japan and, to a lesser extent, Europe have had relatively weak economic performance in recent years, in large measure because structural rigidities—in labor laws, social safety nets, regulation, and so on—have deterred investment and private-sector growth. The United States grew strongly in the 1990s but is now positioning itself for long-term fiscal deficits that could undermine that growth over the longer term. And as we urged Japan in connection with the Asian financial crisis, the industrial countries should feel a responsibility for sound growth policies, not only for their own people, but for the rest of the world.

In addition to managing our own economic policies so as to contribute to strong global growth and better markets for developing countries, there are two primary ways in which the industrial countries can support developing-country growth: trade and aid. Trade—improving access for developing countries’ goods to our markets—is almost certainly the single most important measure industrial nations could take to help developing ones. President Zedillo made this point in our commission discussions as he expressed, in his understated way, enormous frustration with how advanced countries such as ours advocate free trade while impeding imports from the poorest countries. Virtually all developing countries have a strong comparative advantage in cheaper low-skilled labor. In many of the poorest countries, the most important export industries are agricultural products and textiles, which are produced by labor-intensive means. But agriculture and textiles are among the most politically powerful and economically protected sectors in developed countries, and developing nations often find themselves very limited in their access to export markets in Europe, Japan, and the United States. Barriers to trade can be direct—such as tariffs or trade restrictions—or indirect, through subsidies to goods produced in the industrialized world that make it harder for imports to compete. Lowering such import barriers—primarily on textiles and agricultural products, but also on steel, an important product to some emerging markets—would be of enormous benefit to the developing world, especially the poorest countries.

I remember the negotiations around an African trade bill that the Clinton administration supported. We wanted to remove textile duties but were opposed by unions and some manufacturers in this country. Because of their influence, the best compromise we could negotiate was reducing tariffs on African textiles that were made from fiber originating in the United States. The bill that passed has already produced significant gains for the products and nations that were included and is projected to raise the level of nonoil exports from Africa by roughly 10 percent. But the benefit would have been nearly five times greater without adding restrictive conditions on the terms of market access, according to an IMF estimate. And the bill did not apply to developing countries outside Africa, such as Bangladesh, which has more than one million women working in the textile industry and could increase export revenues from such products by an estimated 45 percent, if granted this kind of duty-free access to markets in industrialized countries such as the United States and Japan.

Trade barriers are estimated to cost the developing world at least $100 billion of lost opportunity a year, or by some estimates much more, a multiple of foreign aid spending by all governments. For example, one study estimates that if Africa’s share of world exports increased by 1 percent, its trade revenues could grow by $70 billion a year—five times what it receives in aid and debt relief. The New York Times ran a series of valuable editorials on this issue, pointing out that subsidies to the major cotton farmers in the United States were a critical factor in keeping the two million cotton farmers of the small African nation of Burkina Faso from competing on a level playing field in the global marketplace. The United States took a step backward by passing a ten-year, $180 billion agricultural subsidy bill in 2002, which increased the subsidies that American farmers receive by almost 80 percent. The United States also moved its trade policy in the wrong direction in 2002 when we increased restrictions on steel imports. These measures were damaging to the developing world and make it harder for us to argue for more open trade in the international arena.

In political terms, protecting industries is usually appealing, because the negative consequences of free trade are so visible while the benefits—though much greater—are diffuse. In a discussion with President Clinton about a Japanese trade agreement, I mentioned that one sector where we needed to push for reduced trade barriers was fish. Clinton remembered being in Japan and seeing some poor fishermen casting their lines off the rocks. He said quite determinedly that he wasn’t going to do anything to hurt those vulnerable people. “But Mr. President,” I said, “to help those poor fishermen, you’re going to prevent the vastly greater benefit that would come to the poor throughout Japan from being able to buy cheaper fish.” The damage of trade liberalization to the fisherman was the most palpable. But the preponderant effect would be to benefit a much larger number of other, invisible poor and consumers more generally.

Developing countries benefit from trade and openness, but so do industrialized countries such as our own. Trade and economic ties are sometimes discussed in terms of winners and losers. But while nations are in some sense economic “competitors,” in a more important sense trade is a mutually beneficial dynamic. Success in one country can raise living standards in another, rather than coming at the other’s expense. The United States is already a huge market for the rest of the world and our growth creates opportunities elsewhere. Conversely, growth in Europe and Japan, and successful development in emerging economies, provides better markets for us.

Politicians don’t like to say this, but imports also contribute greatly to our economic well-being, by reducing prices paid by American consumers and producers, by shifting our allocation of resources to areas where we have a comparative advantage in the global economy, and, very importantly, by creating competitive pressure on American companies to be more efficient and productive. This latter factor was central to the revival of American competitiveness in the late 1980s. In contrast, the more restricted trade regimes in Europe and Japan have sheltered protected industries, contributing significantly to lagging productivity growth. Between 1996 and 1999, U.S. imports of goods and services increased by almost $400 billion. Virtually every household in America has a better and cheaper TV, or toaster, or computer, or T-shirt, than would be possible without imports. According to a calculation by a former Federal Reserve economist, if those additional goods and services had not been available to American consumers, U.S. inflation could have been as much as 1 percentage point higher and interest rates could have been more than 2 percentage points higher. When I was at Treasury, I made this case for imports in testimony before congressional committees. Once, Phil Crane, a conservative Republican from Illinois, said I was the only government official he’d ever heard defend imports in public testimony. In speeches and testimony, I joined this case for imports with a strong statement saying that all change—whether from technology or trade—even if predominantly beneficial, will inevitably and unavoidably be harmful to some. Consequently, trade must be accompanied by effective programs to help dislocated workers find new places in our economy. This is not only fair, but will contribute both to productivity and to political acceptance of trade liberalization.

Dramatic changes in the world economy, including technology that links us easily with people working thousands of miles away, mean that low-wage workers elsewhere can provide goods and services in ways that were scarcely imaginable before. India and China in particular have very large numbers of lower-wage workers who are also skilled. Almost all mainstream economists believe that this change will provide great opportunities for both developing and industrial countries, as have past innovations. But all of this will almost surely increase the already sharp debate over trade in the political arena.

That makes efforts to improve the American people’s understanding of trade all the more important. Protectionism may seem tempting in the face of competition from large pools of well-educated workers in low-wage countries. But policies that restrict trade—likely to be matched by similar policies in other countries—would be damaging to our economy and to our consumers, workers, and businesses. However, this new competition does call for the United States to act aggressively to safeguard the drivers of our own growth in productivity by increasing public investments in areas such as education, health care, the inner cities, and effective assistance for those disclocated by trade. Restoring a sound fiscal position will also serve this purpose by promoting lower interest rates, greater confidence, and higher levels of private investment.

While not as central as trade, the emergence of well-functioning capital markets and banking systems is also essential to the advancement of developing countries. Financial institutions are necessary to intermediate between savers and users of capital, and to allocate that capital efficiently. In the Mexican and Asian financial crises, the weak banking systems in almost every case either were part of the cause of the crisis or exacerbated the crisis. Industrial country expertise—from both the public sector and the private sector—can help developing countries create effective legal and regulatory infrastructures and strong banking and capital market institutions. Lack of access to capital in developing countries is a particular problem for smaller and medium-sized companies, which are key to growth. Providing access to capital for these companies has become a strong focus of public policy in many developing countries.

When I traveled to China as Treasury Secretary in 1997, I visited a jewelry manufacturer and exporter in central China that had been state-owned but was now a private corporation that had successfully raised the capital necessary to expand its operations by selling shares on the Shanghai Stock Exchange. If the expansion went well, that would mean more jobs, and, it was hoped, a better quality of life for women such as those I saw making jewelry that day—a direct result of better-functioning domestic capital markets, and a development that would have been unthinkable just a decade earlier in China.

On other trips to developing countries, I also saw several much smaller-scale microfinance projects. These projects provide small loans, with relatively low interest rates, to entrepreneurs who would not be able to get the capital to start a business otherwise. They promote better use of domestic savings by intermediating between small-scale savers and users of capital, and by providing technical assistance and advice to borrowers. In Brazil, Judy and I went to São Paulo’s terrible favelas, or slums, where we saw a small business supported by microlending in which workers were sewing designs onto T-shirts. I toured a child-care facility in Soweto, South Africa, a microenterprise that not only creates jobs but also enables parents to go to work more readily. These projects were examples of ways to make capital markets work better for the benefit of the poorest. Though their capital was provided by domestic savings, most had originally been established by the World Bank, which under the deeply committed leadership of James Wolfensohn has focused far more effectively on issues of poverty and on how to spread the benefits of the global economy more widely.

On the other hand, some countries may be simply too small in terms of population or GDP to have deep and liquid capital markets of their own, or to have domestic banking systems of a size, depth, and sophistication capable of withstanding the vicissitudes of global markets. Many people I worked with disagree, and point out that Singapore and Hong Kong were successful in building up international financial centers from small city-states. But I do not think that’s a realistic model for many others. I remember a poignant conversation I had with Cassim Chilumpha, the finance minister of Malawi, at a meeting in Namibia of the Southern African Development Community in 1998. Mr. Chilumpha told me that his country had tried to do everything right in the eyes of the IMF—it welcomed foreign investment, allowed its currency to float, and so forth. But as a tiny, landlocked, and desperately poor nation lacking in significant natural resources, Malawi had little to export and nothing to attract foreign capital. Policy in Malawi at that point may or may not have been as sound as the finance minister asserted, but the issues he raised seem valid to me. How could tiny and impoverished Malawi develop the institutions or bring in the capital necessary for sustained growth?

One alternative to national financial systems for small countries is to develop regional markets to pool the costs of strong private-sector and regulatory institutions and provide broader and deeper markets. There are often major political obstacles to such multinational cooperation, but the possible benefit is worth the effort if that collaboration is sustainable over time. Another approach is for these countries to be more open to foreign banks and investment banks so as to benefit from their expertise, home-based regulation, global reach, and capital. Although I now work for a private financial institution that operates in many developing countries, I thought this long before I found myself involved in that business. Alan Greenspan once said to me that the biggest problem for many countries in building an effective financial sector is the shortage of skilled personnel for both the private sector and the public sector. This scarcity can be overcome by utilizing the expertise of large global firms.

Finally, foreign aid—carefully designed and well used—is essential to enable developing countries to implement policies to reduce poverty, improve basic living standards, and make a market economy work. On this the United States has done far too little. We now contribute just over one tenth of 1 percent of GDP to foreign aid—directly and through multilateral organizations such as the World Bank—as compared to the longstanding U.N. goal for the industrial countries of spending seven-tenths of 1 percent of their GDP to overcome developing-country poverty. There are serious issues around the effectiveness of foreign aid. But while the problems are real, so are the achievements. There have been great gains in life expectancy and literacy over recent decades and, while there were many factors involved, aid clearly played an important part. Improvements in health care—including the eradication of smallpox, the near-eradication of river blindness in Africa, and much more widespread vaccination programs for children—stand as an extraordinary accomplishment. And in successful Asian countries like South Korea, high levels of foreign aid in the early stages of development combined with a focus on appropriate policies to foster robust growth. Much needs to be done to improve understanding of how to make aid more effective, and industrial countries can do much to help devise and promote sound practices in developing countries and provide technical assistance to support those policies. But based on everything I saw while I was at Treasury, I have no doubt that enough is known to warrant a far more robust program.

In conjunction with the United Nations Monterrey conference, President Bush proposed an ambitious new plan to provide foreign aid to developing countries, called the Millennium Challenge Account. The proposal, which involves spending an additional $5 billion a year, would increase U.S. foreign aid by 50 percent. The program is intended to focus aid on economic growth and development and, importantly, to maximize its effectiveness by giving the money only to countries with sound policies in place. That is a big step forward—assuming the administration vigorously pursues this initiative and Congress fully appropriates the funds—but much more needs to be done.

We in the Clinton administration always argued that foreign aid designed to promote economic growth—as opposed to emergency relief—was truly effective only when joined with real and sustained economic reform, and that aid should therefore be conditioned on reform. This approach to foreign aid is consistent with the crisis response programs I talked about in the context of Mexico, Asia, Russia, and Brazil: assistance will work only if it is conditioned on strong economic policies developed and owned by the countries themselves. Moreover, if financial support is not linked to reform and as a result fails to be effective, this further undermines political support for such financing when it can be useful. That said, there are hundreds of millions of people in countries where the governments are too corrupt or too ineffective to meet conditions attached to aid. And we can’t simply ignore these people until their governments someday change. The international financial institutions, the United Nations, and individual nations need to be far more effectively focused on finding better means to address the needs of the populations of such countries, including affordable medicines, access to clean water, food assistance, and strategies for raising living standards—both because of the enormous humanitarian issue and because it is in our interests.

In any endeavor, however, it is important to make rigorous judgments about the effectiveness—and the risk of unintended consequences—of even the best-intentioned ideas. One proposal that provides assistance for the poorest—broad debt relief—has won support thanks to the involvement of Pope John Paul II and the Irish rock star Bono. I met with Bono after I left the Treasury and before I joined Citigroup, at the suggestion of former Fed chairman Paul Volcker. Despite wearing sunglasses indoors and having only one name, Bono is a thoughtful and serious person with a range of ideas on how to support the developing world. I strongly agree with his separate efforts to get Europe, Japan, and the United States to open their textile and agriculture markets to imports from Africa. But on debt relief I told Bono that while I supported the concept up to a point, his proposal for far-reaching and broad-based relief struck me as potentially counterproductive.

When a borrower is clearly overextended and unable to pay its debts, limited debt relief from the official creditors—governments and multilateral agencies—makes sense. Such a program was put in place during the Clinton years. Perhaps that program should be somewhat improved or expanded. But if debt forgiveness became a broad policy, instead of an infrequent exception, it could undermine private creditor confidence that the principle of debt repayment will be rigorously applied in developing countries—or perhaps even more broadly. Credit markets only work effectively on the basis of this principle. Undermining it could thereby reduce flows of credit, and increase interest costs for the developing world, especially for the poorest countries. Since debt relief is treated as a form of foreign aid in the U.S. federal government budget, my strong preference would be to devote the same resources to alleviating the debt burden of the poorest and most heavily indebted countries through foreign assistance.

Beyond what the United States can do as a country, private citizens can address the problem of global poverty through their businesses, through philanthropy, and through political involvement. Corporations can contribute not just money but also business and technical expertise, as Cisco has done recently in Afghanistan by setting up academies to train people in computer networking. Focused philanthropic efforts, such as the Bill & Melinda Gates Foundation’s emphasis on AIDS and global health or George Soros’s activities in Eastern Europe and West Africa, have made an enormous difference in recent years and have arguably been more cost-effective than governmental efforts aimed at the same problems. People with less money than Bill Gates or George Soros can contribute as well, not just by giving to charities that focus on poorer countries but by becoming informed, engaged, and politically active on behalf of trade and aid.

Most fundamentally, a dramatic change in public attitudes is needed. At one point when I was at Treasury, I thought of going to President Clinton and suggesting that he set up an interagency process to work through the whole set of substantive and political issues surrounding global poverty. Amid the distracting rush of events, I never did. Given President Clinton’s deep interest and involvement in these issues, I now see that as a real lost opportunity. Such an effort could have addressed the difficult issues around growth in developing countries, including questions about what mechanisms would best encourage governments to adopt better policies. We might also have looked at how to overcome the political obstacles to winning support for substantially increasing foreign assistance at home and opening our markets more fully to developing countries. I hope that some future administration will set up such a process, and give it a high priority.

The political challenge, in any case, is immense. My many discussions with senators, House members, and others as I sought to develop support for foreign assistance have led me to believe that what is needed is a large-scale, multi-year public relations and education campaign in support of both foreign assistance and trade liberalization for developing-country exports—something more honest than, but just as effective as, the “Harry and Louise” ads that helped defeat our administration’s health care plan in 1994. Other, more positive examples include highly successful campaigns against smoking and drunk driving. Such a public education effort focused on trade and aid should stress both moral issues and our self-interest imperative in combating global poverty. It should also highlight success stories, such as the eradication of river blindness in Africa. I’ve argued to a number of individuals and foundations that the considerable financial resources this would take could have an immensely leveraged impact if the project changed the political dynamic around these issues. So far, my arguments have been without effect.

   

LET ME CLOSE with a story from an earlier stage of life. I remember once sitting at a lunch counter in Brooklyn, just after finishing law school in 1964. I had a few spare weeks before starting work at a firm in New York and was spending the time auditing trials at the county courthouse. My waitress, a middle-aged Black woman, asked me—out of the blue—whether I thought the day would ever come when all people would be treated with respect and dignity.

I don’t remember very clearly what my answer was, but her question has stayed with me all these years. The desire for dignity and respect is as real for a waitress in Brooklyn as it is for a member of the President’s cabinet, or a student in Pakistan, or a bond trader at Citigroup. People strive to accommodate their physical needs and desires. But once the basics for life are met, their psychological needs—some might say needs of the soul—are key. If the latter are satisfied, life can work well. On the other hand, if the soul isn’t satisfied, possessions won’t fill the void. Among the most basic needs is what I took to be that waitress’s point: the need to have one’s dignity and humanity acknowledged, to be listened to, to have what you say and what you believe taken seriously.

This, to me, should be central to the focus on poverty in the developing world. Our fundamental goal is to satisfy the nutritional, basic health care, educational, and other essential requirements of all of the world’s population. But material sustenance isn’t the sole objective. People suffering in desperate poverty in remote places have the same needs and desires as each of us in the wealthiest nation in the world does—not just for food, medicine, and clean drinking water, but also to be respected as human beings.

In an era when the threat from people who don’t feel respected can lead to dire consequences, treating other nations and their people with dignity may be a simple matter of self-protection. But to me, listening respectfully even to critics and opponents makes even more fundamental sense, as an acknowledgment of the uncertainty and complexity that I believe to be inherent in virtually all issues of import. I think we’ve learned a great deal about how to foster better economic conditions, both in this country and in the developing world—though whether we as a society will choose policies that reflect that understanding is another matter. But in an uncertain world there is no finality about any of these questions. Even thoughtful people who eschew ideology, recognize complexity, and try to work with great analytic rigor will continue to disagree about them.

But while we cannot overcome the uncertainty around economic and other public policy choices, I do think it’s possible to sharpen our sense of the probabilities and thereby improve our decision making. We are living in a time of great geopolitical and economic change, when the choices we make can have huge consequences. Since leaving Washington, I have remained deeply involved in public policy not only because I find it engrossing but because it matters so much. Working on this book over the past few years has furthered my own thinking about these issues while reminding me of what I’ve felt for most of my adult life—that the quest for the best possible answers is never-ending.