"The Challenges of Globalization"

Remarks by Joan E. Spero, Under Secretary of State for Economic, Business and Agricultural Affairs, at the World Economic Development Congress, Washington, DC, September 26, 1996.

It is a pleasure to be here with you for this fifth annual meeting of the World Economic Development Congress. I would like to talk to you today about the challenges of the increasing integration of the world economy. The evidence for globalization is striking:

-- Capital now moves with startling speed around the world. Each day over $1 trillion is traded in a global foreign exchange market that never closes.

-- Technological advances in computers and telecommunications are paving the way for a new information-based economy.

-- Even small and medium-sized companies recognize that the competition for market share is global, and that participating in the global economy is no longer a choice but a necessity.

What is the role of governments in shaping the new global economy? One role is to get out of the way -- to remove barriers to the free flow of goods, services, and capital. But, just as free markets at home require an appropriate legal and institutional framework to function properly, so a more integrated world economy also demands effective international institutions and "rules of the game." These can only be established through cooperation among governments. Moreover, the domestic economic choices that governments make will have a major impact on international patterns of trade and investment, as well as on the prosperity of individual countries.

Globalization presents governments with three principal challenges:

-- First, how should we further shape a new international economic architecture?;

-- Second, what are the new issues and rules which globalization requires us to address?;

-- Lastly, how can we attempt to assure that all countries and all segments of society benefit from globalization?

I. Economic Architecture

Let me turn first to the the new global architecture. By that, I mean the institutions and structures of the international economic system. In the post-World War II era, the United States gave strong support to the establishment of a formal international architecture based on the Bretton Woods institutions, the GATT, the OECD, and the European Common Market. Despite occasional setbacks, this architecture served the needs of its era well, and promoted global prosperity and security. But the demands of the current era of globalization on international institutions are likely to be much greater.

The lines between domestic and international financial markets have increasingly blurred, requiring closer international cooperation in monitoring financial institutions. Trade negotiations are as concerned with ensuring that domestic policies of individual countries promote open market competition as they are with traditional trade barriers, such as tariffs. Thus, the relationship between regional economic arrangements and the overall global system will have to be even more carefully coordinated.

The international financial institutions created at the Bretton Woods Conference -- the World Bank and the IMF -- show how the objectives of key parts of the international architecture can evolve over time. While the Bank and the Fund were originally established to finance European reconstruction and to manage the fixed exchange rate system, they have assumed a series of new roles as the global economy has evolved: recycling petrodollars in the 1970s, resolving the developing country debt crisis of the 1980s, and aiding the transition to the market in formerly socialist economies during the 1990s.

The international financial institutions will remain an important element of our economic architecture in coming decades. They will need to continue providing guidance and assistance to developing and transition countries seeking to reform their economies and to follow a market-led strategy of development. They will also become increasingly involved in assisting environmentally sustainable development, alleviating poverty, promoting good governance, and encouraging private capital flows.

The recent Mexican peso crisis underscored the extent to which financial turbulence in a major emerging market country could threaten global financial stability. Subsequent events have demonstrated the appropriateness of the international response to the Mexican crisis. However, the experience has revealed weaknesses in existing international arrangements. A new facility will double the financial resources available to the IMF through the General Arrangements to Borrow, and will strengthen the ability of the IMF to manage similar crises in the future. The IMF has also improved its ability to identify potential crises in advance and take preventive steps through stronger surveillance of economic policies.

The successful conclusion of the Uruguay Round resulted in a much needed strengthening of our multilateral trade regime. The Uruguay Round Agreement cut tariffs on manufactured products by over one-third -- the largest reduction in history. For the first time, international trade rules were established to cover trade in services as well as trade-related investment and intellectual property issues. The Uruguay Round Agreement also established more effective rules for the prompt settlement of disputes.

From an institutional standpoint, of course, the most important accomplishment of the Uruguay Round was the creation of the World Trade Organization. The WTO provides a permanent forum for resolving disputes and for further expanding the scope of multilateral trade rules. The first WTO Ministerial Meeting will be held this December in Singapore. It will need to make progress in completing the work of the Uruguay Round, in particular the unfinished agreements on basic telecommunications and financial services. It will also need to look ahead to new issues like environmental and core labor standards and transparency in government procurement.

Regional initiatives can also provide an important impetus for international economic integration. A smaller number of countries may be able to reach agreement on liberalization measures that go beyond what could be achieved at a global level. Their experience may also provide valuable lessons for rules or approaches that could be adopted more generally and serve as a catalyst for multilateral liberalization.

The United States is building new economic relationships through regional efforts in Asia, in the Americas, and in Europe. Our participation in the Asia Pacific Economic Cooperation forum, or APEC, reflects the great importance the United States attaches to economic engagement in that dynamic region. First established in 1989 as a loose consultative organization, APEC reached a turning point in 1993 when President Clinton brought the 18 APEC leaders together for the first time in Seattle. The following year, APEC leaders pledged to achieve free and open trade and investment in the Asia-Pacific region by 2010 for developed countries and 2020 for developing ones. This fall in Manila, APEC members will put forward explicit national and regional action plans to open markets.

Here, in the Western Hemisphere, countries have joined together to support the spread of democracy and to bolster the process of economic reform underway in the region. In December 1994, President Clinton hosted 34 democratically-elected leaders at the Summit of the Americas in Miami. There, we committed to strengthen democracy, combat poverty, promote prosperity, and protect the environment. We also agreed on a new framework for regional cooperation, including the creation of a "Free Trade Area of the Americas" by 2005.

Our partnership with Europe has also been updated to meet new challenges. Economic cooperation is at the heart of the New Transatlantic Agenda we have launched together with leaders of the European Union. The Agenda calls for a the establishment of a "New Transatlantic Marketplace" in which trade and investment barriers will be reduced or eliminated.

Finally, I want to point out that business is an especially active participant in each of these regional arrangements. Last year in Osaka, the APEC leaders established a Business Advisory Council to institutionalize the critical role of business in APEC and to ensure that the views of the business community are fully considered in setting new polices. In Europe, a Transatlantic Business Dialogue composed of 200 CEOs from American and European companies keeps us focused on actions of potential benefit to the private sector.

II. Emerging Issues

In addition to designing a new international economic architecture, we also need to redefine the agenda of these institutions and to identify those issues which need to be addressed more effectively in the future. The potential list is too extensive to cover comprehensively today. Let me focus on three which should be of particular importance to this audience: investment, telecommunications and corruption.

Foreign direct investment has become perhaps the single most powerful force behind global economic integration. In 1992, the worldwide sales of foreign affiliates of multinational companies reached an estimated $5.3 trillion dollars, over $700 billion more than total global exports of goods and services that year. Foreign direct investment has also spread new technologies and improved skill levels, especially in developing countries.

In today's global marketplace, trade often follows investment, so host government regulations on foreign investment can have a major impact on trade flows. That is why we need improved international rules on investment. The inclusion of trade-related investment measures in the Uruguay Round Agreement was an important first step. The United States has taken the lead in pushing for a Multilateral Agreement on Investment in the OECD, which would establish a broad, multilateral framework for international investment. We want a "state of the art" agreement with high standards for the liberalization of investment regimes and investment protection, and with effective dispute settlement procedures. The agreement would be open to any country, including non-OECD members, willing to accede to its disciplines.

As I noted earlier, the current revolution in telecommunications is another key factor in the accelerating pace of globalization. Increased competition and improved technology have led to a dramatic decline in communications costs. The real cost of making a three-minute phone call from New York to London dropped 99 percent from the 1940s to 1990.

But to realize the full potential of recent advances in communication, we need to build a Global Information Infrastructure (GII). This new GII should be based on the five principles adopted by the International Telecommunications Union: private investment; market-driven competition; flexible regulatory systems; non-discriminatory access; and universal service. While considerable progress has been made in developing the GII over the past two years, much important work remains to be done. New international rules on telecommunications services are clearly required. The United States has urged all countries to improve their offers in the current WTO negotiations on basic telecommunications services and to conclude an agreement by next February. We are also pressing for an Information Technology Agreement that would eliminate tariffs on a wide range of technology products by the year 2000.

Bribery and corruption undermine the most basic principles of good governance and the rule of law, and pose an obstacle to economic development and fair market competition. This has led the United States to push for tougher international rules on corruption.

While most countries prohibit bribery of their own officials, only a few -- including the United States -- prohibit bribery of foreign officials. Earlier this year, the Organization of American States concluded an Interamerican Convention Against Corruption. It commits member signatories -- 26 so far, including the United States -- to criminalize bribery of foreign officials. OECD members also agreed that the tax deductibility of bribes should be prohibited and committed themselves to working on the next step: criminalizing bribery. This will not only improve economic efficiency and spur economic growth. It will also level the playing field for business.

III. Spreading the Benefits

The third and final question I'd like to consider today is perhaps the most difficult and troubling: How can we spread the gains of globalization more broadly, so that developing countries and all segments of society in wealthy industrial countries also benefit?

Poor countries with weak links to the global economy risk falling further behind in the next decade. A return to the rhetoric of redistribution that dominated the debate over a "New International Economic Order" in the 1970s is not the answer. The old statist model of economic development has been discredited, as has the view that the international economic system is fundamentally biased against developing countries. Experience has led to a new consensus on development. Successful growth depends primarily on national policies that promote macroeconomic stability, trade and investment, human capital formation, and good governance.

But such policies may not be enough on their own to restore growth in some of the most economically distressed countries. The international community will therefore need to continue providing substantial flows of development assistance. More explicit emphasis should be given to promoting sustainable development, alleviating poverty, and encouraging economic reform. Multilateral development banks can play an important role in promoting good governance and the development of small and medium scale private enterprises. And we can promote trade and investment opportunities.

Globalization presents challenges for developed countries as well. It has been blamed for high unemployment in Europe and the stagnation of real wages in the United States. But increased competition from imports is at most a secondary explanation for the decline in real wages of less skilled American workers. Two other factors are almost certainly more important: 1) some slowdown in U.S. productivity growth and 2) technological changes that increase the demand for better-educated workers.

In fact, the deepening of international integration in coming decades should stimulate economic growth in the U.S. and encourage the creation of new, better-paying jobs. During the past 15 years, U.S. exports have risen at a faster annual rate than those of any other G-7 country, including Japan. The United States was the world's leading exporter again in 1995, and our exports support jobs that pay 12 to 18 percent more than comparable positions in non-exporting firms.

While the benefits to the United States of participation in the world economy are clear, we can only maintain domestic support for further trade liberalization and economic integration if the process is perceived as fair and equitable. In the short run, liberalization can involve adjustment costs. NAFTA recognized this fact and included innovative provisions designed to provide transitional assistance to displaced workers. NAFTA also recognized the need to set and enforce basic labor standards. The United States believes that the issue of the relationship between trade and labor must now be addressed in the WTO.

IV. Conclusion

President Clinton has made preparing Americans to compete in the 21st Century a top priority of his administration. The Clinton Administration has stressed the need to invest in training and education to ensure that American workers have the skills needed to succeed in the new global market. It has committed to ensure access for all Americans to telecommunications and information technology. It has reduced the budget deficit, creating a more stable macroeconomic environment for private saving and investment. And it has taken the lead in reforming the international economic architecture, increasing trade and investment opportunities for American firms and creating jobs for American workers.

The future impact of globalization will vary from country to country and within countries. But efforts to resist the powerful technological and economic forces behind globalization by appealing to protectionism are misguided, and in the long run, futile. Rather than fear the future, we must redouble our efforts at international economic cooperation. We must strengthen the architecture of global and regional institutions to promote open trade and investment and prosperity for all. This is the best way to ensure that the benefits of globalization will spread to all corners of the world and to all sectors of society.