America's man to save world finances
News Analysis: Lawrence Summers reveals his reform plans
Thursday 04 February 1999
In an exclusive interview with The Independent yesterday, Mr Summers emphasised the scale of the challenge facing the US and other governments.
"There has been considerable repair in recent months, but there are still very important challenges," he said.
He said he would not characterise himself as an optimist. "World growth is likely to be considerably lower than it has been in recent years. There is a lot for policy-makers to do."
One of the preoccupations of the US Administration that emerged at the recent gathering of the World Economic Forum in Davos was the reliance of the rest of the world on the American economy, the only significant engine of growth at present.
"One of the challenges is ensuring that the world economy flies on multiple engines, not just the US," said Mr Summers.
He echoed the view expressed by Al Gore, the US Vice President, that American consumers and companies could not act as importers of last resort for the rest of the world. The strength of US growth set against the rest of the world's is helping send the country's balance of payments into record deficit.
Asked whether he thought other G7 countries were doing too little to stimulate their own growth rates, Mr Summers added: "The important priority in both Japan and Europe has to be domestic, demand-led growth. The use of macroeconomic policies to achieve that is important, and they must carry through on that agenda."
He was careful not to predict that the successive waves of financial and economic crisis were now over, and in particular remained cautious about prospects for Brazil.
The success of the IMF-led rescue for Brazil now depends on the Government's ability to implement budget reforms - tax increases and spending cuts - in the face of political opposition. "Brazil's policy choices, the choices made by the government and people of Brazil, will be profoundly important, and certainly also to the US," Mr Summers said.
One lesson of the turmoil in emerging markets that started in Mexico at the end of 1994, and re-emerged in east Asia in mid-1997 was, he concluded, that good economic policies, in the sense of sound money, low budget deficits and structural reforms, do work. "When countries are able to implement good policies, then, like Korea and Thailand, they have started to recover."
The experience of successive crises had also set clear priorities for reforms to the international "financial architecture". At the top of the list was improved transparency.
"For the American capital markets, the most important single innovation was the idea of generally accepted accounting principles," he said. The spread of these principles "has the potential to bring about far-reaching cultural change".
In addition, better banking supervision and regulation would be needed. Mr Summers said the Basle capital standards, set by the Bank for International Settlements, would be reviewed.
Thirdly, the international authorities needed better systems of crisis response.
Asked whether such detailed changes would satisfy the critics - like George Soros - who argue that the world financial system has fundamentally broken down and needs sweeping reform, he replied: "These are serious and technical matters, but they are very profound."
However, speaking hours before the US Federal Reserve decided to announce its decision to leave US interest rates unchanged this month, Mr Summers was considerably less gloomy about the outlook for the US economy.
"The basic momentum of the US expansion should be maintained," he said, "albeit with some ups and downs."
"The economy is growing rapidly, inflation is low, the banking system is well capitalised and there is great flexibility. It gives the economy the ability to respond well to any shocks."
There were two important priorities for the US, in his diagnosis. One was working to combat inequality, the achilles heel of the remarkable success of the American economy.
The other was raising the saving rate, which has fallen to zero for the household sector. The private sector as a whole has a record financial deficit.
Mr Summers admitted, somewhat reluctantly, that he saw some merit in the "new economy" argument that new technology had improved the country's underlying performance.
"New developments in information technology are very important, and there's no question we seem to be in a period when normal rates of unemployment have fallen and normal rates of growth have risen."
But he went on: "These are real changes but it would be a mistake to assume they will be permanent changes.
"Still, I am increasingly convinced information technology will change the way the economy works."
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