Presentation by Dr. Jeffrey Sachs
Director, Harvard Institute for International Development

Rapporteur, Daniel H. Else

Thank you very much, Harry [Harding, Dean of the Elliott School of International Affairs, George Washington University], especially for this kind invitation to be here at the Elliott School. Let me thank the Japan Automobile Manufacturers Association also for making this possible. I've been looking forward very much to this discussion, and I hope that my voice holds out long enough so that I can do my side of the discussion. When my voice quits, you'll have to chime in. We really can have a dialogue. We may have to have one per force, depending on how this cold develops over the next hour.

Overview: Advantage America (and not the Vast Majority of Humanity)

Dean Harding suggested to you how complex the issue of globalization is, and how many challenges have been raised about the nature of the process in which the whole world is living right now — on an economic, social, cultural, and political level. I can only hint at some of the questions, and even fewer of the answers that will be challenging us for many years to come.

I would like to address the question of globalization from the perspective of how we can make it work. I define "making it work" in a very particular way — that is: how can we help to make this process work for the vast proportion of humanity?

I can say at the start that globalization is surely working for America. Those who argue that globalization is somehow hurting the US economy must have been asleep over the last ten years, and failed to understand that a lot of the most remarkable and sustained boom in economic activity, innovation, and wealth creation is related to the fact that the United States is now able to sell its products, its technology, its ideas to a much vaster world market, and is able constructively to face competition from the rest of the world as well, thereby increasing the efficiency and productivity of our own activities at home.

The real problem with globalization is not what some on the streets of Seattle thought, that somehow this is a great ill for America, which I will try to stress in more detail. It is, all to the contrary, one of the great benefits for our country. The problem really is that the benefits of globalization are not yet reliably reaching the rest of the world. The deepest sense in which globalization is not yet working is the sense in which the promise of a unified, market-based, international system with a common set of rules should help to raise the living standards and conditions, the material conditions, particularly for the poorest of the poor of the world. I think that what we can say is that whether it is through the crises of the emerging markets in Mexico, in East Asia, in the former Soviet Union, in South America in 1999, or whether it is the failures of the structural adjustment programs of the International Monetary Fund (IMF) and the World Bank to lead to notable, sustained improvements of material conditions in the countries of sub-Saharan Africa, much too much of the world is not sharing in the high rates of economic growth that the United States has enjoyed during the 1990s. I believe that that is by far the most critical issue that the world faces.

We don't feel that way, necessarily. We have our complaints, but believe me, our complaints ain't nothin' compared to the real issues that confront the vast majority of the world.

Let me just remind you in the most encapsulated form that we are living now in a world of six billion people, only one billion of which live in the so-called developed, or high income countries. Five-sixths of humanity, 85 percent of the world, are in what the World Bank classifies as developing countries. Two billion of those people are in low income countries. This is not low income as in American households finding it hard to make ends meet, this is low income in the sense of living on a dollar a day. The average income for those two billion people is $350 a year. I'll ask you in a few minutes to contemplate what it means to have the health spending in a country at $250 or $300 a year total income per capita be on the order of $3 or $4 per person when the disease burden is many times anything imaginable in the context of our society. What it means is watching your children die from diseases that are preventable by easily available vaccines and drugs that are just too expensive to procure. Or it means whole populations where the young generations doesn't even have a fighting chance to get started because already by the age of five, 40 percent of the children are malnourished, with all of the cognitive and physical disabilities that this is going to lead to over a lifetime.

So when we think about globalization, the point I want to stress today is that we really should think about the globe, not just about us. We are the richest, most comfortable, strongest country in the world, and we are a great beneficiary of the changes of recent years. This is evidenced in spectacular economic performance. Maybe not quite as spectacular as the NASDAQ suggests — I don't want to say that there isn't just an element of euphoria, a bubble created here that we may rue in the next few years — but there is something real here also, a phenomenal burst of productivity growth and of innovation, and a level of material well-being unimaginable even 25 years ago.

How Globalization Doesn't Work for Much of the Globe

Now, in what sense is globalization not working for much of the world? I think that there are three different cuts at this that I'd like to quickly explain.

First is a geographical view of the globalization process, to try and identify from a geo-spatial perspective, global scale, where globalization is tending to work and where it is tending not to work. The second cut I want to take is a political perspective. A lot of the problems about globalization and whether individual counties benefit have to do with the domestic politics in those countries. The third cut I want to take at it is international governance, because globalization is also failing to work in the sense that I defined it, that is, reliably spreading improving material conditions to a large proportion of the world, partly because of flaws of international governance.

Once we have those three perspectives, then perhaps we can at least hint at some of the solutions that would be appropriate to this challenge.

The World in Three Parts — Core, Near-periphery, and Everyone Else

I tend to see the world right now, in a conceptual sense in terms of globalization, in three different parts. I guess there are two kinds of people in the world, those who divide the world into two, and those who divide the world into three or more. I'm a three or more person. This is vastly oversimplifying, but I hope helpful for you. It's at least helpful for me.

The Core

I see first a Core, high income group of countries. My basic message is that, by and large, globalization is working pretty reliably for those countries. Japan is the only minor exception to this, in the sense that Japan has not had good economic growth for a decade. But I don't count Japan in crisis. Japan is one of the most sophisticated and marvelous societies and countries in the world, and shortfall of material well-being is not high on the list of problems. So maybe the economic growth isn't as high as it could be or should be, but it is not a country in crisis, so it's only a small footnote that I would add.

So the core parts of the world (now this is a very tendentious term, of course, which has been used for decades in social thought, but I think it has some merit) — "core" in a sense that I'll explain, but basically the high income parts of the world — are a very small proportion of the world, both in land area and in population. About a billion people in the world, about a sixth of humanity as I noted, and a very small part of the inhabited land mass in the world. It's the United States and Canada, it's western Europe (that small western peninsula of Eurasia), it's a small part of the Pacific Rim, a few coastal cities of China, South Korea, Japan, it's Oceania, and it's a few small slivers of the Southern Cone, because remember that there are some rich parts of South America even though on average these countries don't live up to their economic potential.

Well, it happens, as a first point, that there is a geographic logic to this which is quite astounding and almost not studied by modern economists, and that deserves a lot more focus. All of the rich countries of the world almost with no exception are in temperate zones geographically. There are almost no rich countries in the tropics, and there are probably some pretty good reasons for that, as I'll come back to. This is not just history, but physical geography as well.

The Near-periphery

The second part of the world that I would draw your attention to is — and again it is a tendentious term though it is not meant that way but it is meant as an analytical term — is what I would call the Near-periphery. By Near-periphery, I mean the group of developing countries that are geographically proximate to the high income areas. These are very interesting places in the world right now.

In our hemisphere, of course, Mexico is the quintessential example. Central America belongs in that description, and the Caribbean belongs in that description as well. In Europe, there are two margins of crucial importance. The first is the North African border of the Mediterranean — Morocco, Tunisia, Algeria, Libya, and Egypt — up along the Levant to Turkey, and then up along the Balkans and up through the border states of the European Union (EU). So going up: Slovenia, Croatia, Slovakia, the Czech Republic, Hungary, Poland, and then across to the Baltic States. This is the borderline region of Europe. In East Asia, which is much more spread out and archipelagic, you still have a kind of border region as well, which Southeast Asia probably should be classified as falling into. Certainly coastal China, from Hainan Island up through Tianjin is a region that is on its way to development by being proximate to Japan, to Korea, to the other high income countries of the region.

By the way, I should just mention, since we are in East Asia for the moment on this tour, that the only tropical zone rich countries in the World Bank's classification of high income countries are Hong Kong, Singapore, and half of Taiwan, which is cut by the Tropic of Cancer. Interestingly, ecologically Taiwan is not a tropical area, it has a subtropical climate, and Hong Kong and Singapore are two counter examples that prove a rule that I am going to come back to.

So you have the Core and you have the Near-periphery, and then you have everybody else.

Everybody Else

Everybody else is a lot of people right now. Depending on your count and exactly how you want to treat China and exactly how you want to treat India, we are talking about between 1 1/2 and 3 1/2 billion people in the world. They are what I would call the Distant Periphery. They are not on the edge of major markets. In general, they are tropical in geography. Their ecological systems, their health problems, their agricultural issues, their construction issues, their energy use issues, are very distinct from those of the rich countries.

This is extremely important. You cannot solve their technological problems with solutions off the shelf. All our medical research is focused on cardiovascular disease and cancer not on producing a malaria vaccine. That is just an example of a general phenomenon: this distant periphery is not just farther away, but actually it is quite different in life experience and in human conditions. But one thing is for sure — it's all poor.

So it's mainly in the tropics. It's mainly very poor. It's very heavily malnourished as a proportion of the population. There are terrible pressures of population growth. Terrible pressures of health, to which I'll return.

If on top of that, you happen to be landlocked, you're really in the distant, distant periphery. Because the marvels of globalization, as I come to them, are marvels of the ability to benefit from the rest of the world through trade and social, cultural, and scientific interactions. Being landlocked is a major barrier, even in this day of Internet and airplanes, to international trade because the costs are simply much higher.

So think in your mind of the tropical landlocked countries, and you will see countries with a lot of problems. In our hemisphere, it's Bolivia and Paraguay. In Africa, it includes Mali, Chad, Niger, Central Africa Republic, Uganda, Rwanda, Burundi. Not a lot of high income countries in that list, or real success stories. In Asia, you have central Asia, one of the most sparsely populated parts of the world and also a very poor part of the world: Turkmenistan, Kazakhstan, Tajikistan, Kyrgystan, and my "favorite" from this geographic perspective, Uzbekistan, because Uzbekistan is the only twice-landlocked country in the world, which means that all of its neighbors are landlocked as well.

That is a terrible problem, by the way. Generally, coastal countries don't like to help their landlocked neighbors. The weaker the better is often the reasoning, from a military point of view. So they don't build the roads, they don't give access to the ports. If you have to cross two international borders, as Uzbekistan does, you've got some real problems ahead, which they do.

How Globalization is Working

Now if you look at where globalization is working, you will see that these different regions are experiencing very different conditions.

First I should take just a moment to say what globalization is. I suppose as a good academic, I must define my terms. By globalization I mean the increasing economic integration of a national economy with the rest of the world, generally in four senses: trade, finance, globalized production, and the fourth aspect, harmonization of the rules of the game, mainly through the multilateral institutions such as the IMF, the World Bank, and the World Trade Organization (WTO). So that's what I mean by globalization.

Of course, some of those elements have been around for about five millennia, some for two millennia. We don't want to always think that we're on the edge of a unique phenomenon, but the intensity of this process has definitely accelerated, and dramatically so, in the last ten years.

So how is this process working?

Well, Adam Smith, some 224 years ago in 1776, made some darn good observations about globalization. He really got it right, by the way. It's still the best book on economics, The Wealth of Nations. I recommend it to you not just for the history of thought, but for a darn good read. You could skip a few of the chapters, but it is still very wise. Interestingly, by the way, Adam Smith said in 1776, that the two most momentous events in world history were the discovery of the Americas and the discovery of the navigation route from Europe around the Cape of Good Hope to Asia. So for him, globalization was the essence of what was most important to humanity, or potential for humanity. This is quite interesting.

Why? Because Smith pointed out what is the lifeblood of economics: that trade, exchange, diffusion of ideas, specialization, all of those things is the real font of sustained economic growth. So we should believe that by having a bigger, integrated international system, lots of good things are going to happen. We'll get more specialization, we'll get more productivity through a more sophisticated global division of labor. When we chop up the production process into fifteen stages and parcel it among countries, that allows for more efficiency of global production. When we invent things which are then used in a world market rather than a national market, not only are the innovations spread more widely, but the incentive to innovate is vastly larger, because innovation is an increasing-returns-to-scale activity. You just have to make the blueprint once, and then if you can sell it in a wide market, the returns are much higher than making the same blueprint but then only being able to sell the results in a small market. So innovative activity should also in principle be spurred by this.

Globalization Applied to the Regions

So we should start from the point of view that globalization is probably a good thing for the world. But now let's look at what's happening.

I guess what my point will be, yes, globalization is good. It's good for all of those countries, but it's not enough for many of them by a long shot. It's far from sufficient, and in the wrong political context, or the wrong global institutional context, it can have some rather devastating effects.

By the way, Adam Smith also knew that. Underscoring the humanism of that man, who was the great embodiment of the Enlightenment, he noted that when that trade route to East Asia was found, that it would be wonderful for Europe, but an absolute disaster for the native inhabitants of what is now Southeast Asia who were beaten up by the Europeans and ended up being colonized by them. It was Smith himself who said he looked forward to the day when that region would be powerful enough to be able to have a mutual balance of fear with Europe so that the benefits of globalization would be shared by everybody. So even in 1776, he was on to the fact that if power is highly unequally distributed, then the economist's theorizing may be overcome by the realities of power. We have some of those problems today as well.

Let's apply this basic logic to these three regions briefly.

The Core

For the Core, I think you have to say that the 1990s has been a very good period. Well, it has been a superb period for the United States, it has been a good period for Europe, and I would say a mediocre period for Japan. Maybe our Japanese colleagues would be a little bit darker about the 1990s, but every time I visit Japan it is such a wonderful, exciting and successful society, that I have a hard time viewing this as a real crisis. I just view it as a growth pause, but not as a crisis.

I guess you have to say that, on the whole, if you are rich already, globalization is treating you pretty well, and maybe spectacularly well. No great problems — some annoyances here and there, some trade frictions here and there — but certainly nothing that looks even remotely like disaster.

The Near-periphery

Now, the Near-periphery is quite interesting. On the whole for the Near-periphery, globalization is a good thing, and it's already showing itself to be a good thing. That is because economic development is a diffusive process. It spreads in a geographical context. So, if you have a rich country next to a poor country, like water going from high potential energy to low potential energy over a waterfall, or heat being conducted from a hot point on a tube to a cooler point through a thermodynamic diffusive process, so, too, economic development will diffuse on a geographical gradient. Why? Because transport costs are low, because firms find it advantageous to invest in their low-wage neighbor to take advantage of low labor costs and then reexport to the main market. That's what we're doing in Monterrey, Mexico, or that's what Japan has done in Thailand to the benefit of Thai development, bringing a lot of foreign investment into Thailand over the last 25 years. So you get a geographical gradient, and on the whole, you can say that for the Near-periphery, globalization is a very good bet.

I knew that when I advised Poland. I really felt it very strongly. "Drop the borders, you're going to get rich." They thought I was crazy: "Drop the borders and we're going to get overrun." I said, "No, no, no. Your products are going to overrun high-wage Germany, not the other way around. Open up your trade and you will grow." So they've had a decade of six percent growth now, because they are right on the border of a rich region. That is a lot of diffusive power. So, Volkswagen goes to get its components next door, German textile firms do their garment sewing and stitching in Poland, chemical firms go next door, machine tool firms go for their moldings and castings to Poland — in other words, you get a lot of foreign investment, which raises incomes and technology, and is paid for by exports back to the European Union.

Pretty much down that boundary of eastern Europe are where the successful transition economies are located: Estonia, Poland, Hungary. Even Slovakia, which had terrible leadership under Me�ar, was growing pretty fast.

It seems paradoxical. Isn't policy everything that counts? No. If you are a 40 minute taxi ride from Vienna to Bratislava, that counts, too. So the Austrian firms were flooding over to Slovakia. They didn't read all the textbooks to know how bad the policy was. They wanted low-wage workers to reexport their products to western Europe. So it was working there. Even in the middle of a war zone, Croatia and Slovenia were doing pretty well — especially Slovenia.

And interestingly, if you look across North Africa, North Africa's doing pretty well right now. Egypt has been growing at about six percent growth for the last five years. I have some worries; there are a number of issues; and maybe I'll mention them just as an illustration. Morocco and Tunisia are growing at about five percent per year. Algeria is in the midst of a civil war, and Libya is not exactly in this game. But you can see that the labor-intensive, oil-scarce countries that are close to western Europe, just across the Mediterranean lake are doing very well. They're growing fast, because that's what being in the near-periphery does.

What are the counter examples to this?

First, if you are in the middle of a civil war, like Algeria has been, you don't get these good results. Second, take a case like Mexico or Egypt, because they have similarities. On the one hand, there is the pull of the major market nearby, but on the other hand there is a phenomenal and dangerous push of demography. Rapid population growth in an already very stretched environment. Egypt is a very thin line along the Nile, and it's very crowded with very poor peasants. So you find that while in the Nile Delta region, in Alexandria, and in Cairo you can create a lot of jobs, the population growth and the environmental pressures are a downside and a big risk looking out 25 or 30 years.

Look at Mexico. Mexico is like two countries right now. From Mexico City north, you have development. In the south, you have insurrection, because Chiapas is not part of the near-periphery. It's part of Mexico, but it's part of the far-periphery, because it is a tropical zone of very low productivity agriculture. The latifundia, the large land owners, employ terribly abusive social relations, and it's not where Intel, or Microsoft, or General Motors is locating when it goes to Mexico.

So you can see the geography working on a gradient within these large countries. In this regard, being smaller is probably more helpful. Tunisia, 9 million people — they'll make it. But Egypt, it's a much, much bigger place, and at risk, and so is Mexico. It's a race between the positive forces and the adverse forces.

The Far-periphery

What about the Far-periphery?

Here the race is so much more tilted toward the adverse forces up until this point, that you really have a billion or more people falling further and further behind. They are the very poorest people in the world. Maybe many more than that. We just don't have the data, we just don't know what's happening.

Why is this?

Because when you're in the Far-periphery, many of these countries can't find their way to hook up to the rich markets. They are not the sites of foreign direct investment (FDI) for Intel, or for the automobile producers, or for the pharmaceutical companies, or for others that have brought technology and jobs. Generally when you look at them, these countries are stuck in an unfortunate niche in the world markets as primary commodity producers, very often of just two or three commodities — and very typically with declining long-term trends in the relative prices of those commodities.

This is a clich� that's true. The Andes is stuck in oil and coca, in fishmeal, and tin, and bananas. It doesn't get you rich; it doesn't even get you development. Sub-Saharan Africa is stuck in coffee and tea, and diamonds, and oil. But you look awfully hard to find a manufacturing export other than a lightly processed natural resource export from almost all of sub-Saharan Africa to this day, with the exception of temperate zone South Africa, which exports cars, Volkswagens. For all the rest, it's 95 percent primary commodities. That niche does not work. You don't get the technical change, you get secular decline in the terms of trade, and you get tremendous growing population pressure because very poor rural people have lots of children as their social insurance, as their need to maintain farm life. Even though they are poor, total fertility rates may stay at five or six for the number of lifetime births of a woman on average, for example. So you would have large regions of the world that don't know what we're talking about when we talk about the wonders of globalization.

My problem with the IMF and the World Bank is that 20 years of structural adjustment lending in these countries hasn't even recognized the problem, much less solved it. Twenty years in sub-Saharan African countries, and there is, despite the label structural adjustment, no structural change. I don't see Tanzania having gone from primary commodities even to ready-made garments. Much less to information-based systems. That's true of all of Africa. There has been no structural adjustment.

It's not as if the US has been very helpful in this, as you know.

We've just had a terrible row about the most modest kind of legislation to help the most desperate part of the world. God forbid we should let them export some ready-made garments. Of course, our textile interests view this as the most horrendous sin imaginable, but more to the point, they simply stopped the legislation.

So, no change in this distant periphery. In many cases, the population pressure is building. Because of the squeeze on the land — as best one can judge, although I must stress the data on this are terrible — the caloric intake and the protein intake of a large part of the population is worsening rather than improving over a 15 to 20 year period.

Real Worries

That's a broad generalization, obviously. But it is, when I go to sleep at night, a kind of rank ordering of what I'm worried about. I'm not so much worried about the rich countries at all. I'm not so much worried about 98 percent of what is being debated in the presidential campaign, frankly, because I don't think that those are such material issues compared to those which we are discussing this evening.

I'm not so worried about the Near-periphery countries. I didn't have a lot of angst about Poland's economic reforms. I knew that that waterfall was going to save Poland. I always told them that they had the world's worst geography for 200 years because they sat between Prussia and Germany on the one side and the Russian Empire on the other. The armies crossed six times and destroyed Poland each time. So that was a terrible piece of real estate. But I told them that in 1989 and at peace, it might be the best piece of real estate in the world, because they really have the advantage of being caught up in growth. So I'm not surprised at what I see.

I'm also not surprised that Russia does so much worse. Actually, I'm surprised at how much worse it does, but I'm not surprised that it does considerably worse, because being 5000 miles farther to the east makes a big difference to this whole mechanism.

So I lose less sleep over the Near-periphery, although I'm nervous about Mexico for reasons that I have explained. I think they have a greater chance now.

I'm desperately nervous about the rest of the world and its chance to have some benefits from all of this, especially in the face of growing environmental and population challenges which are not being compensated for by engagement in the modern world economy.

I wanted to brush up this picture in two main respects. This is a little bit too geographically determinist for our tastes, and it's not strictly right for that reason, also. Internal governance makes a big difference, and global governance makes a big difference as well.

The Effect of Internal Governance

So let me quickly say a word about internal governance. First I'm going to say a negative word: it's vastly overrated.

I say this because if I listen to the World Bank and the IMF, I think the only thing that is at issue is governance. But governance is not going to stop 300 infective malaria bites in Garki, Nigeria. It's just misunderstanding a lot of the realities to say this is a matter of governance rather than geography, or productivity, or resource dependence, or other things. It's an easy and lame crutch often but it sure does matter, also, in many other contexts. Let me just rattle them off quickly.

Governmental Bankruptcy

If you are bankrupt — and I don't mean morally, I'll come to that — if you are physically bankrupt, it's very hard to make use of globalization. My basic theorem is if the government is broke, society cannot be stable. Governments need resources to govern. They need to pay off interests. They need to buy the police and the army, and so forth. Governments need money. When they are broke, they can't govern. And when we berate them for not governing, we're really berating them for being broke. This often has nothing to do with them, because they inherited bankruptcy from somebody else.

I raise this point because the concept of state bankruptcy, which I think is one of the most important concepts of political thought and economic thought, isn't even a concept in international parlance most of the time. We've had maybe 75 countries whose governments have been financially bankrupt in the last 25 years, and I mean in the literal Chapter 11 sense, if only there were a Chapter 11. But there is no chapter 11, and the IMF thinks another loan is Chapter 11, which it isn't when you're bankrupt.

So a lot of what is called bad governance is being broke. You try it. Try running a household when you're bankrupt. It ain't easy. Governments can't govern when they're broke, so that's one thing that goes wrong.

Minority Governance

Second, there really are a lot of nasty places in the world. One good indicator is when minorities govern majorities. I don't have to tell you how many places are like this. Deeply socially divided countries, and particularly those with minority rule have a hard time governing, because if they govern transparently they get booted out of office. It almost goes without saying that if you are a conquering minority, you're a nasty son-of-a-bitch because you cannot govern transparently. A lot of places in the world have small, privileged elites that rule over large, dispossessed majorities. It isn't surprising that politics doesn't work in those countries. There's a deep problem. I'm thinking of places like Guatemala where those of Spanish descent have governed over an indigenous population, brutally, for four centuries. There are many, many other cases — apartheid South Africa, of course, was like that as well.

Starting New States

Then there are the problems of starting up new states and many other political phenomena that I'm not going to go into. But these are general states of lawlessness even when you are not bankrupt.

I'll put Russia in the category of being both bankrupt and lawless. Even if they weren't bankrupt they probably would have been lawless. They happen to be both bankrupt and lawless because the Soviet Union ended because of financial bankruptcy, among other things. The new Russian state inherited the Soviet debt. A lot of it was canceled yesterday. Well, thank you — it was obvious ten years ago that this was a problem, but it wasn't addressed because we pretended that those things were not problems for a very long time. As soon as the banks forgave a lot of the debt in yesterday's deal between Russia and its bank creditors, our governments in our democracies said, "We're not going to do that." So, just to show how wise and farsighted international leadership can be in these issues, you deny the problem for a decade, and then you drag out solutions for another decade or two. That's where we are.

Inadequate Global Governance

Let me turn finally to global governance, because that's also highly problematic. We've had facts on the ground much faster than the institutions could help to provide the necessary global rule of law and global international standards. We've seen that in many different contexts, but the most dramatic of these contexts are two.

First is the context of the emerging markets crises of recent years, where we learn that our international institutions were simply not up to the task. Basically, globalization in the sense of financial flows proceeded without any rules of the game, in terms of standards, regulatory environment, disclosure, and so forth. All those emerging markets that got into trouble had the characteristic that they were actually not the worst failures in the world, but the relatively successful countries — so successful that they were able to borrow quite a bit from abroad in these new, open international markets. Our banks were willing to lend their banks enough money to get both sides into a lot of trouble, and then get us in a lot of trouble when the IMF and the World Bank bailed out our banks as they decided to get out in the second half of the 1990s.

So, the basic point — and it's too schematic to be helpful — perhaps, is that globalization proceeded ahead of rules of the game that are needed to make financial markets work. We have a rich panoply of regulatory systems within our country to make sure that financial markets don't keep getting us into totally crazy situations. They used to. We used to have serious banking crises every twenty years in this country — 1873, 1896, 1907, and then the mother of all banking crises, 1932-33. Finally we got smart and put in deposit insurance, put in the Securities and Exchange Commission, put in the lender of last resort function of the Fed (Federal Reserve System), got off the gold standard and did other things to make it possible to get out of that cycle. We haven't had a serious banking crisis in this country since 1934, as a result of the regulatory changes. So, financial markets didn't work by themselves here either, but we ended up creating a legal, and regulatory, and institutional system to get out of that cycle of regular, very deep, very serious banking crises.

On the international side, we have not done that. The IMF has proved to be, so far, utterly ineffectual either in heading off these crises or even in ameliorating them when they start because so many of the emerging markets collapsed in the middle of these crises. Even though it started in Asia in 1997, nobody was able to stop the most recent round from coming gradually over the course of a year and a half to South America, where it hit with a vengeance in 1999. All forewarned, all watching in advance, all watching in slow motion. Clearly the system at the global level isn't working right.

A Fundamentally Unfair International System

The second thing that I would say is that we have not created a system that is fair yet in the sense of governance and transparency, balance of interests, and especially attending to the problems of the weakest part of our world, that is the very poor. This is the second major area of deep crisis at the global governance level.

We have an international trade system in which the United States comes to these meeting indignant �indignant over labor standards and the environment but is utterly unwilling to talk about barriers to trade in the products the poor countries could sell to us, such as garments, utterly unwilling to talk about our abusive use of anti-dumping procedures in this country, unwilling to talk about modifying the intellectual property rights to guarantee that essential medicines can get to the poorest people of the world at below patent cost prices, but above production cost prices, and so forth. Indignant!

Well, it's perfectly sensible if Vice President Gore is facing presidential primary election challenges in highly unionized Midwestern states that local politics would make that decision. But for the richest and most powerful country in the world to behave this way for the world system is really shocking, actually, and very, very disheartening. That's the true story in Seattle. Not the streets, but the fact that the richest country in the world was unwilling and unable because of its domestic politics even to begin to face up to the truth of the inequities of the international system.

Creating New Institutions

I would add as a second matter that we have not developed the concepts or the institutional arrangements to be able to handle the deeper challenges of development of the distant periphery.

What do I mean by that?

If like me, you don't believe that it's just governance, and "just do what we say and like it and you'll grow," but it's really deeper problems of pervasive tropical disease, very low productivity in tropical agriculture, sharply rising populations in these areas, environmental degradation and pressure and so forth, then you would like a set of international institutions that could actually try to address those problems. But we don't really have it. The World Bank, in the end, is a bank. You don't address most of those problems with a bank.

We need research institutes. We need research funding. We need strategies to apply science to these problems. That's not what a bank does, and that's not what we get. So the World Bank, yes it supports agricultural research in the tropics. Do you know how much? $30 million a year. Monsanto alone has an R&D (research and development) budget of about $900 million a year. One company for temperate zone agricultural research.

Hinting at the Answers

So we don't have an international system yet facing up to the problems. So that's why, in this last minute, I'm going to tell you what to do.

No, I'm not. I have alerted you to the problems, and I'm going to just hint at some of the answers, very telegraphically so that we can have some discussion.

First, we have to have a deeper understanding about why development does or does not work. I stress that, I'll put it aside. We have caricatures coming out of Washington, we don't have a deep analysis of what's really happening in the world. We pretend that all countries are at the same point on the race. We pretend that everybody can make use of all this. We don't have an adequate framework for understanding these problems. That's number one.

Second, we have a global governance system that is still deeply skewed toward the interests of the richest countries. Not that globalization is bad for the poorest, but it's not good enough. We've got to bias the system in the interest of the poorer parts of the world. We've got to aggressively eliminate the barriers to trade for the manufactured goods that the poorer countries could export to us, for example, to help them create vitally needed jobs in nontraditional, non-primary commodity sectors, so that they can make their cities work. Their rural areas can never develop without functioning, export-oriented cities in the tropical countries. That means exports to the major markets, and that means getting rid of the multifiber agreements, letting Africa export ready-made garments without all this nonsense that we've been through in this country, eliminating the abuses on the anti-dumping measures, and so forth.

We need an international system that is transparent and balanced in its governance. That does not mean just waiting for the European Union to tell us who the next head of the IMF is. As the French finance minister so charmingly said, "We are a country of great traditions, and the tradition is that that's our position." You know, that's very witty, but for the other 90 percent of the world, it's not quite so charming.

We need a world in which the poorer countries can finally be relieved of their debts, because when they are bankrupt, they cannot govern. If governance is important, which it is, it's absolutely critical that they be able to govern. It's also absolutely critical that they have enough fiscal resources to raise public health spending above $5 per capita per year, and not be spending it on debt services. That's why it's important that Japan, as a major creditor, join in this debt reduction initiative, because Japan, unfortunately, has been one of the most resistant countries in the world in this regard. It is perhaps the most generous country in overall scale of aid, but it has been very resistant to debt reduction. I think doing both is extremely important, and very realistic in countries that are bankrupt.

Finally, we need a set of international institutions that really can understand, and deepen, our economic, and our scientific, and our social scientific understanding of the processes that are in place. This process of technical and scientific understanding is a very subtle, rich process. It means international assistance for science. It means mobilization of new foundations such as the Gates Foundation, which has given a billion dollars for vaccines recently. It means the continuing leadership of foundations like the Rockefeller Foundation, which played such a vast role in public health and tropical agriculture in the past. And finally, and I'll stop here, it means a very active role for the universities in this country and around the world, in partnership, to work together with each other, and to work together with the private sector, the international public sector, the international nonprofit sector, such as foundations, to expend the effort which is vitally needed so that we can really, truly, make globalization work.

Thank you.

Dr. Jeffrey Sachs is the director of the Harvard Institute for International Development and the Center for International Development, the Galen L. Stone Professor of International Trade at Harvard University and a research associate of the National Bureau of Economic Research.

This lecture was made possible by a grant from the Japan Automobile Manufacturers Association, Inc.