Meeting with Noreena Hertz in the Institute of Social Studies series 'It's not the economy, stupid!'
Speech by Dutch Minister for Foreign Trade Frank Heemskerk at the meeting with Noreena Hertz in the Institute of Social Studies series 'It's not the economy, stupid!'
Ladies and gentlemen,
I have just been to South Africa and Mozambique with my colleague Bert Koenders, the Dutch Minister for Development Cooperation. I have seen what the financial crisis means to people, to businesses and to local governments.
The crisis is hurting rich countries and poor countries alike. But it is far more devastating for people in poor countries. Even in South Africa, one of the richest countries of the African continent, more and more people can no longer afford medicine for a sick parent, or send their children to school, or serve their family a proper meal.
We will be discussing the exact causes of this crisis for years to come. It started with the banks, and perverse incentives and bonuses that promoted short-term profits over long-term gains. But clearly our global financial system is flawed too. Governments, regulators and oversight agencies have made big mistakes. And our current economic model has to be looked into as well.
Does this mean we should ditch capitalism altogether? Should governments take over the economy? Of course not. Should we reverse globalisation and revert to protectionism? Of course not!
Our market economy is far from perfect, but it is the best economic model we have. Overall, trade has made people and countries richer. So I still believe in free and open markets.
But the sad truth is that not everybody is better off. Too many people are worse off. In the developing countries, while millions rose out of poverty in the past decades, many others fell into it. Even in rich countries like Holland, some people have lost out. We have to be honest about this.
So while I believe we should continue opening up markets, I also believe that we need to address people's legitimate concerns. Because if we don't, they will lose faith in open markets and vote for proponents of protectionism. Just look at the outcome of the European elections in Holland! If the anti-globalisation parties continue to grow, we will all suffer, rich and poor.
In this speech, I want to share some thoughts about where we should go from here. This crisis is a terrible ordeal for many people. But it is a great opportunity as well:
- an opportunity to close the global governance gap;
- an opportunity to choose a path towards fair and sustainable globalisation;
- an opportunity for developing countries to take responsibility for lifting their peoples out of poverty.
Since I am a member of the Dutch government, I will focus on the role of governments, in both developed and developing countries. But I believe businesses have a major role to play as well. The big companies benefit from globalisation; they should realise that they need to work to increase public support for it, at home and abroad.
Closing the global governance gap
Let me start with the first opportunity this crisis gives us. Financial institutions have become global actors, but regulation is still primarily a national affair. This has created what is called the 'global governance gap'. This is why what began as a local credit crisis, developed into a global economic crisis. We did not realise the magnitude of the risks our home markets were exposed to - until last year.
Now we know that we need better oversight of the global financial players, at national and international level. In other words, we need to close the global governance gap.
I would like to discuss three tasks that our countries need to tackle together.
First, rich countries need to stop using emerging countries' savings to finance their habit of overconsumption on credit. And emerging countries need put less emphasis on export-based development, which leads to their piling up hard currency reserves. China in particular should invest a much bigger share of its income at home. That will mean less money for the US and Europe, but more for domestic consumption, social security and health care.
Second, we have to tackle the problem of firms that are 'too big to fail'. As long as big financial institutions that take too many risks can count on government bailouts, there is something fundamentally wrong with our societies. Today the taxpayers are footing the bill for banks' mistakes. Will they be willing to do it again next time? I don't think so. So stricter international oversight is absolutely necessary.
This means for example that governments have to clamp down on perverse bonuses. We should eliminate the incentives that encourage reckless behaviour. The Netherlands pressed for steps in this direction at the G20 summit in London in early April. The decision was taken there that national and international oversight agencies will keep an eye on remuneration policies (1).
The third task is to sharply increase the IMF and multilateral banks' financing capacity and government support for trade finance, especially in developing countries. We made agreements on this point too at the G20 summit. From now on the IMF can help countries with payments or reserve problems without immediately imposing a strict adjustment policy. This means that countries will not be forced to make cuts in social security, health care or education when times are hard already. To my mind, this means the period of the Washington Consensus is closed for good.
But we need to take a broader view of global governance. To me, improving global governance means more than ensuring financial and economic stability and improving oversight of financial institutions. We also need to win broad international acceptance of the international agreements and standards that we are using to try to put globalisation on the right track - such as measures against tax evasion, bribery and money laundering, and guidelines for corporate social responsibility and transparent corporate governance.
For this reason, the Netherlands is actively helping to flesh out Germany's idea of a Charter for Sustainable Economic Activity and Italy's idea of Global Standards. These two initiatives are aimed at making economic relations fairer, more sustainable and more transparent. We hope to make concrete agreements on sustainable economic activity and global standards at the G20 in September.
Closing the global governance gap is a big challenge. But the current crisis gives us an unprecedented opportunity to meet it. If we want to reform global capitalism, the time is now. There is real momentum for sustainable reforms on a global level. Just look at the progress we have made at the IMF and the G20!
Choosing a fair and sustainable path towards globalisation
We should take advantage of people's sense of urgency. This crisis is already undoing much of the progress Africa has made over the last decade - progress that was achieved thanks to open markets. But as growth rates are plunging worldwide, so is support for open markets. The downturn risks undermining people's support for globalisation. It is already fuelling protectionism. We must resist this temptation, because protectionism always ends up harming our countries and others.
We need more trade, not less. Especially now, because trade can speed up a healthy recovery of the global economy. So we need to conclude the Doha Development Round successfully as soon as possible. Calculations show that Doha would increase incomes worldwide by some 160 billion euros.
Trade is not part of the problem, but part of the solution to poverty and inequality. That is why I like going on joint missions with my colleague Bert Koenders, the Minister for Development Cooperation. We both believe that trade is better than aid. So 'aid for trade' is central to our development policy.
But as I said earlier, not all the poor are better off. Too many of them have seen their situation grow worse, especially in Africa. According to the World Bank, Africa is becoming the world's poorhouse (2).
That is not acceptable. Globalisation should benefit all Africans. So we should be fair and cautious when opening up markets. Africa needs to take a sustainable path towards freer trade. And we need to compensate those negatively affected by trade.
How? One good example is the economic partnerships that the European Union is currently negotiating with the ACP countries, Europe's former colonies in Africa, the Caribbean and the Pacific. The agreements we are making with them are aimed at gradually integrating them into the world economy. These accords are 'asymmetrical', meaning that the EU opens its markets completely to products from these countries while they only open their markets gradually. They have extended transition periods, are able to completely protect part of their markets, and can take protective measures when imports pose a threat to their industry (3).
So there are ways to stimulate international trade while addressing the needs and concerns of those who lose out. This should be our goal: fair and sustainable globalisation. Open markets can and should benefit us all, rich and poor.
Developing countries' responsibilities
This brings me to developing countries' own responsibilities.
International trade has contributed significantly to growth and prosperity in developing countries. But it is only the icing on the cake. The cake has to be baked at home. And in this respect developing nations show some severe shortcomings.
I don't want to dwell on this inconvenient truth. We are all aware that corruption is widespread in the developing world and that inequality may be an even bigger problem than poverty. Many developing countries have a few extremely rich people, who too often evade taxes, and nothing to spare for the masses. Many countries fail to provide basic health care and education, let alone a social safety net.
Trade and liberalisation should be part of our solutions to helping poor countries develop. We should abolish tariffs on agricultural products, as Noreena Hertz has argued on other occasions. We need to help developing nations keep up with our product requirements. And we have to allow their people to study and gain work experience here in Europe.
But that is no excuse for developing countries' failure to clean up their act. China could easily invest more of its earnings from trade to improve people's lives at home. Poor countries could easily tear down the absurd trade barriers between them, as the EU-ACP agreements try to do. Why should it be more expensive to export from Zambia to neighbouring Tanzania than it is to export from Zambia to the EU?
So the developing countries should take their share of responsibility for making globalisation benefit their entire population.
Conclusion
To conclude: this crisis is a unique opportunity to reform our capitalist system and make globalisation both fairer and more sustainable. It is a chance to close the global governance gap and give developing countries better conditions for development.
Western governments are in the driving seat at present. We should:
- restore financial and economic stability and reform the international financial system;
- resist protectionism and economic nationalism;
- set standards for sustainable economic activity and global governance;
- help developing countries integrate safely into the global economy.
But we cannot do it alone. Developing countries need to take their share of responsibility.
The poor have every reason to be concerned and disgruntled with the economic mess we are in. To quote World Bank Senior Adviser Deepa Narayan: 'The poor need something quite different: bigger, better access to free markets designed to work for them.'
Thank you.
(1) If financial institutions fail to cooperate in devising sound remuneration policies, oversight agencies could sanction them, for example by imposing higher capital requirements.
(2) The proportion of the very poorest people in Africa's population has increased in recent decades. The continent was home to 14% of the world population in 2004, but almost a third of the very poor. The World Bank forecasts that in 2015 40% of the very poor will live in Africa.
(3) While the EU grants ACP countries full market access under liberalised rules of origin, the ACP countries are allowed to exclude 20% of their products from liberalisation. And the extended transition periods for the products for which market access is required make phased liberalisation possible.
Incidentally, the ACP agreements are meant to encourage not only North-South trade but also South-South trade. Trade barriers between poor countries are a serious brake on their growth and make regions like Africa less attractive to foreign investors. So regional cooperation is vital. The mere fact that the ACP countries are negotiating as a bloc with the EU is leading to more dialogue and cooperation among them. I think this is a very positive development.