1 I have coined this term to lump the international financial institutions (IFIs) and the World Trade Organization (WTO) together.
2 George Soros, Open Society: Reforming Global Capitalism (New York: PublicAffairs, 2000).
4 The reconstruction of war-torn Europe was an important part of the World Bank’s mission. In the end, it was carried out under the Marshall Plan.
5 The public sector’s share in the Gross Domestic Product (GDP) has not necessarily declined, but the ways in which the funds are raised and spent have significantly changed.
6 For example, The Economist Survey on Globalization (September 27, 2001) denies that globalization has reduced the ability of the state to impose taxation and regulation.
7 Economic analyses of the impact of globalization yield mixed results. The World Bank’s Dollar and Kraay find that developing countries with the biggest increase in trade as a percent of GDP post-l980 have experienced higher and accelerating growth compared to their “pre-globalizing” performance and compared to the performance of “non-globalizing” developing countries. These countries have reduced the income gap with industrial countries. The study found no correlation between changes in trade to GDP and inequality within countries. However, absolute poverty has declined in the “globalizers.” On the other side of the debate, Harvard economist Rodrik argues that domestic innovation targeted at domestic investors is a far more important factor in improved economic performance than trade opening. David Dollar and Aart Kraay, “Trade, Growth and Poverty,” Development Research Group, The World Bank, June 2001. Dani Rodrik, “The Global Governance of Trade as if Development Really Mattered,” submitted to the United Nations Development Program (Harvard University, July 2001).
8 Amartya Sen, Development as Freedom (New York: Alfred A. Knopf, 1999).
9 Human Development Report 2001 (New York: United Nations Development Programme, 2001).
10 Commission on Macroeconomics and Health, Investing in Health for Economic Development (Geneva: World Health Organization, December 2001).
11 Kissinger quotes Richelieu as having said, “The state has no immortality, its salvation is now or never,” which Kissinger takes to mean that states are only rewarded for might, not for doing right. Henry Kissinger, Diplomacy (New York: Simon & Schuster, 1995). In the nineteenth century, Viscount Palmerston said about British foreign policy that, “We have no eternal allies and we have no perpetual enemies. Our interests are eternal and perpetual.” Speech in the House of Commons, March 1, 1848. John Bartlett, Familiar Quotations: A Collection of Passages, Phrases, and Proverbs Traced to Their Sources in Ancient and Modern Literature (Boston, MA: Little, Brown, 1992), page 397.
12 The situation has improved under the leadership of Kofi Annan.
13 Denmark, Norway, the Netherlands, Sweden, and Luxembourg.
14 The World Bank’s World Development Report 2000/2001, prepared by a team of development experts led by Ravi Kanbur and Nora Lustig, explores these issues and findings extensively and includes an exhaustive bibliography of the relevant literature. The Bank’s Paul Collier and David Dollar have done ground-breaking work and written extensively on these issues. Their key recommendations are summarized in Collier and Dollar, Can the World Cut Poverty in Half? How Policy Reform and Effective Aid Can Meet the DAC Targets (Washington, D.C.: World Bank, Development Research Group, 1999).
15 Collier and Dollar state bluntly that, “the research evidence is that donors have not had a lot of impact on policy (at least not positive impact).” Can the World Cut Poverty in Half?, 21. Many evaluations of multilateral aid and the effectiveness of Fund conditionality consistently conclude that the higher the degree of local “ownership” of reforms, the greater the success. An IMF paper prepared for a series of seminars on conditionality concludes, “Policies are not likely to be implemented in a sustainable way unless the authorities accept them as their own and unless the policies command sufficiently broad support within the country.” Concerns that “overly pervasive conditionality” is undermining ownership have led the IMF to begin to simplify and reduce conditionality in its programs. See “Conditionality in Fund-Supported Programs—Overview,” prepared by the Department of Policy Development and Review, IMF, February 20, 2001, paragraph 14.
16 About 85 percent of my foundation money is spent in the beneficiary countries. By comparison, only 44 percent of the money loaned by International Development Association (IDA) and the World Bank over their existence has been spent in the borrowing countries themselves.
17 The movement likened the idea of debt forgiveness to the biblical concept of Jubilee. Pope John Paul II declared 2000 a year of Jubilee.
18 The G7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. The G20 includes the major emerging market economies.
19 Data is for 1999, in Agricultural Policies in OECD Countries: Monitoring and Evaluation 2001, Table III.
20 Net Official Development Assistance (ODA) by Development Assistance Committee (DAC) members in 2000 was US $53.7 billion; found at
www.oecd.org.
21 The Bush administration has entered into deals with individual members of Congress to obtain their votes in favor of fast-track negotiating authority. These deals do not augur well for the Development Round. For example, the administration committed itself to withholding some concessions on the importation of textiles promised to African and Caribbean countries.
22 Except that products made by prison labor are outlawed.
23 Countries that have or adopt regulations that are found to clash with WTO rules can be subject to trade sanctions by other members.
24 The preamble of the Agreement Establishing the World Trade Organization—like the preamble of the UN Charter—sets out a list of noble goals on which it has so far been unable to deliver. The WTO charter states that trade “should be conducted with a view to” ensuring full employment with rising incomes, while protecting the environment and in accordance with sustainable development.
25 Creative destruction is the term used by Joseph Schumpeter to describe economic progress under the capitalist system. See Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York & London: Harper & Brothers, 1942).
26 See “Nafta Deal Changed to Curb Companies,” Financial Times (U.S. ed.), August 3, 2001, page 3.
27 John Kay, “Intellectual Rights and Wrongs,” Financial Times (U.S. ed.), March 21, 2001, page 17.
28 According to Médecins Sans Frontières, of 1,223 new medicines brought to market between 1975 and 1997, only 13 were for the treatment of the tropical diseases that least-developed countries most commonly face.
29 Based on a discussion with high-powered mining company executives.
30 The Uruguay Round of negotiations under the General Agreement on Tariffs and Trade (GATT) led to the establishment of the WTO.
31 After Seattle, WTO head Mike Moore pointed out that the annual budget of the World Wildlife Foundation ($350 million in 2000) is three times larger than that of the WTO.
32 “Eliminating World Poverty: Making Globalisation Work for the Poor.” White Paper on International Development (Presented to the British Parliament by the Secretary of State for International Development by Command of Her Majesty, December 2000);
www.globalisation.gov.uk.
33 Aid and Reform in Africa: Lessons from Ten Case Studies, edited by Shantayanan Devarajan, David Dollar, and Torgny Holmgren (Washington, D.C.: The International Bank for Reconstruction and Development/The World Bank, April 2001).
34 The conditions are formalized in Memoranda of Understanding.
35 My proposal was “greeted with amusement” according to the Frankfurter Allgemeine Zeitung.
36 George Soros, “A Cold-Cash Winter Proposal for Russia,” The Wall Street Journal, November 11, 1992, page A10.
37 It was a period of hyperinflation.
38 Both absolute and relative poverty increased sharply in the transition countries, according to World Bank data. See World Development Report 2000/2001 (Washington, DC: World Bank 2000), Table 1.2.
39 I proposed setting up a fund to finance SMEs in partnership with the World Bank, but the Bosnian government insisted on controlling the fund. The World Bank had to comply with the requirements of the Bosnian government, but I did not: The fund never came into existence.
40 I have used the acronyms in common use in official circles to indicate the bureaucratic nature of the enterprise.
41 William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics (Boston: MIT Press, 2001) gives an insightful account of the pitfalls of international assistance and the unpredictability of outcomes.
42 Stephen Holmes, “What Russia Teaches Us Now: How Weak States Threaten Freedom,” The American Prospect (July-August 1997): 30–39.
43 Delta is the change in the value of an option that corresponds to the change in the value of the underlying security. For instance, a one-month call option on $1 million dollar/yen at a strike price of yen 125 when the spot price is yen 122 is equivalent to an outright position of $181,100 dollar/yen.
44 See box on pages 76–77 for a description of SDRs.
45 The report of the United Nations Secretary General’s High Level Panel on Financing for Development, chaired by former Mexican President Ernesto Zedillo. See
www.un.org/esa/ffd/a55-1000.
46 Assuming that all 38 members currently included in the “transaction plan” contributed their SDR allocations. See Financing IMF Transactions, Quarterly Report (Washington, DC: International Monetary Fund, June 1, 2001–August 31, 2001).
Because of the way the allocation formula was constructed, certain anomalies occur in the distribution of the special SDR allocation. For example, the United Kingdom will get a very small allotment. Some arrangement would have to be made to ensure that the United Kingdom contributes its fair share. These anomalies would disappear in regular SDR allocations, which are based on countries’ quota shares, which in turn roughly reflect countries’ relative economic strength.
47 The IMF Articles require that holders of SDRs other than the IMF itself and its member governments have to be “prescribed,” that is, approved, by the IMF executive board with an 85 percent majority. Other holders have to be “official entities.” The proposal here is that the executive board should delegate the responsibility of determining eligibility to receive donated SDRs to an independent board, although technically it would retain legal authority.
48 I propose to include judicial reform because IFIs are not allowed to pay supplemental salaries to judges and governmental employees. That is often the stumbling block to judicial reforms and anticorruption programs. For instance, Georgia, one of the most corrupt countries of the world, appointed qualified judges selected by competitive examination by promising decent salaries but subsequently was unable to deliver on its promise, and the World Bank supported reform effort failed. Programs eligible under this scheme would not be subject to that constraint.
49 Cf. Easterly, The Elusive Quest for Growth, 113.
50 The importance of a rating agency is illustrated by the recent problems of the Grameen Bank in Bangladesh, reported in The Wall Street Journal, November 27, 2001, page 1.
51 Soros, “Assembling Afghanistan,” Washington Post, December 3, 2001, page A21.
52 The combined foreign exchange reserves of the European Central Bank and national central banks totaled EUR 393 billion in October 2001.
53 IMF Annual Report 1986 (Washington, DC: International Monetary Fund, 1986), 111.
54 “SDR Allocation in the Eighth Basic Period—Basic Consideration,” IMF Staff Report (Washington, DC: International Monetary Fund, November 16, 2001), box 3, page 13.
55 Trust funds could greatly enhance the usefulness of existing international institutions. The UNDP in particular could play a valuable role. The UNDP, like the World Bank, has a rather heavy infrastructure, with on-the-ground representation in all the less-developed countries, but its official budget is much smaller and its use is strictly circumscribed. Trust funds would give it more leeway. The UNDP would still need the approval of the host country, but trust funds could concentrate on reform-minded governments and enhance their capacity to absorb assistance. Trust funds would also be a channel for providing resources directly to community groups in countries with nonreforming governments. This would be particularly valuable at times of revolutionary regime change: It would remove a bottleneck that often stands in the way of success. For instance, the UNDP in partnership with my foundation is paying supplemental stipends for qualified Yugoslav citizens returning from abroad. In many countries, it would be necessary to pay qualified judges a supplemental salary at least on a temporary basis to fight corruption. but at present no funds can be found. The World Bank has a rule against paying the salaries of public servants. The UNDP is well placed to fill this need.
56 Currently, approximately 60 percent of IDA’s lending is financed with donor contributions, the rest largely from re-flows and income generated by the Bank’s loans. Annual lending by IDA is significant, averaging around $6–7 billion per year, but falls far short of the acute needs of the developing countries, and is only one-fourth to one-third of the amounts loaned through the Bank’s non-concessional window.
58 Under Section 701 of the International Financial Institutions Act, the U.S. Executive Directors of the IFIs are instructed to oppose any loan or other assistance to governments that engage in “a consistent pattern of gross violations of internationally recognized human rights, such as torture or cruel, inhumane or degrading treatment or punishment, prolonged detention without charges, or other flagrant denial to life, liberty, and the security of person.” The law exempts from this requirement “assistance directed specifically to programs which serve the basic human needs of the citizens of such country.”
59 The Dutch have recently untied their money, the United Kingdom is doing the same, and pressure is growing for others to follow suit.
60 The crisis of 1997–1999 threatened to engulf the international financial markets in the aftermath of the Russian default in August 1998. The U.S. Federal Reserve arranged a rescue operation to prevent failure of Long Term Capital Management (LTCM) and lowered interest rates three times in quick succession in October and November.
61 A paper presented by Michael Hutchinson and Ilan Neuberger of the University of California at Santa Cruz at the Dubrovnik Economic Conference in June 2001 concluded that currency and balance of payments crises reduced output over two to three years by about 5 to 8 percent cumulatively. IMF Survey, July 30, 2001, page 259.
62 Shortly after his swearing in, U.S. Secretary of Treasury O’Neill told an interviewer that the failure to stop financial crises was a failure to let markets work. “It doesn’t have anything to do with the failure of capitalism. It’s to do with an absence of capitalism.” Gerard Baker and Stephen Fidler, “US Signals More Hands-off Stance on Global Markets,” Financial Times (London), February 15, 2001, page 1.
63 Named after U.S. Treasury Secretary Nicholas Brady.
64 The IMF’s own assessment of fiscal policy in the Asia programs is critical. See “IMF-Supported Programs in Indonesia, Korea and Thailand,” IMF Occasional Paper No. 178, June 30, l999. Fiscal tightening, it states, was intended to restore investor confidence in being repaid, hence reducing pressure on the capital account, and to avoid crowding out the private sector as credit availability declined. In the event, “the thrust of fiscal policy . . . turned out to be substantially different . . . because . . . the original assumptions for economic growth, capital flows, and exchange rates . . . were proved drastically wrong” (page 62). Monetary tightening in Thailand and Korea supported the priority objective of stabilizing the exchange rate, but in Indonesia massive liquidity injections to counter a run on banks led to an explosion in base money and continued currency depreciation (page 38).
65 George Soros, “Avoiding a Breakdown: Asia’s Crisis Demands a Rethink of International Regulation,” Financial Times (London), December 31, 1997, page 12. George Soros, “To Avert the Next Crisis,” Financial Times (London), January 4, 1999, page 18.
66 As the Asian experience shows, when governments try to offset this disadvantage through directed lending or other direct or indirect subsidies to domestic companies, they may sow the seeds of future instability.
67 In 2000, 64 percent of global net capital exports flowed to the United States, compared to an average 35 percent in 1992–1997, according to the IMF’s report, International Capital Markets: Developments, Prospects and Key Policy Issues (Washington, DC: International Monetary Fund, 2001).
68 It has been argued that currency fluctuations are no wider than the price swings in some basic commodities. But that does not change the argument; both are disruptive.
69 IMF staff estimate that a one percentage point increase in U.S. interest rates could reduce developing country GNP by half a percent annually relative to baseline forecasts. See V. Aurora and M. Cerisola, How Does U.S. Monetary Policy Influence Economic Conditions in Emerging Markets? United States, Selected Issues, IMF Staff Country Report No. 00/1.12 (Washington, DC: International Monetary Fund, 2000).
70 In 1997, the Korean central bank kept no record of loans of less than 12 months’ maturity. The bulk of the loans outstanding fell into that category, aggravating the crisis. There is a new IMF data disclosure standard that includes frequent and detailed public reporting of long- and short-term debt. Korea subscribes, as do more and more IMF members. The annual Article IV report reviews how close a country is to meeting the standard and what the gaps are. However, good data on private sector debt are still hard to come by, even for industrial countries.
71 The Basel Committee on Banking Supervision is a consultative body of central banks and bank supervisors of the Group of 10 countries of Europe, Canada, Japan, and the United States.
72 Article VIII.2.b gives the Fund the power to sanction capital and exchange controls that could prohibit and limit the availability of foreign exchange for certain payments overseas, but there are questions about the IMF’s legal jurisdiction in this area vis-à-vis national contract law. Courts in different countries have given different interpretations. For a summary of these issues, see “Resolving and Preventing Financial Crises: The Role of the Private Sector,” An IMF Issues Brief, March 26, 2001.
73 Anne Krueger, First Deputy Managing Director of the International Monetary Fund, Address to the National Economists’ Club Annual Members’ Dinner, American Enterprise Institute, Washington, D.C., November 26, 2001.
74 The expression “open society” was not known at the time of the Declaration of Independence. The term was first used by Henri Bergson in 1932 in Two Sources of Religion and Morality. One source is tribal and supports a closed society; the other is universal and gives rise to an open society.
75 This information comes from the Stockholm International Peace Research Institute.
76 “To those who pit Americans against immigrants, citizens against non-citizens, those who scare peace-loving people with phantoms of lost liberty, my message is this: Your tactics only aid terrorists for they erode our national unity and diminish our resolve. They give ammunition to America’s enemies and pause to America’s friends. They encourage people of good will to remain silent in the face of evil.” Testimony of Attorney General John Ashcroft before the United States Senate Judiciary Committee, December 6, 2001.
77 For example, at the height of the Asian financial crisis, Eisuke Sakakibara, who was then in charge of the Japanese Ministry of Finance, proposed creating an Asian Monetary Fund with significant resources. Under pressure from the United States, the plan was soon dropped.
78 Jonathan Schell, “The Folly of Arms Control,” Foreign Affairs, September/ October 2000, pp. 22–46.
79 The Vision 2020 statement of the United States Space Command declares its goal is “dominating the space dimension of military operations to protect US interests and investment. Integrating Space Forces into war fighting capabilities across the full spectrum of conflict.” See
www.spacecom.af.mil/usspacecom/visbook.pdf.
80 The United States Office of Management and Budget (OMB), “Federal Resources in Support of National Defense,” Fiscal Year 2000.
81 Interestingly, when Gorbachev was in charge of the Soviet Union he was genuinely concerned about the survival of humanity, and he thought that he would find a willing partner in the United States. The Chernobyl nuclear disaster was a traumatic experience for the Soviet leadership and he was really worried about a bumbling bureaucracy being in control of a tool as dangerous as nuclear power. Gorbachev sponsored an International Foundation for Survival in which Andrei Sakharov participated. Gorbachev also paid up the Soviet arrears to the UN and came to the General Assembly to announce his “new vision” but his appeal was ignored by the United States.