Living Dangerously

We cannot be content just because 1998 did not end with a global financial meltdown and the U.S. and Europe achieved a good economic performance despite the debacle in the emerging markets and in Japan. If last year marked the end of U.S. and European complacency toward what was wrongly perceived at the beginning as just a regional crisis, 1999 is already shaping up as the year of living dangerously.

The continuation of economic growth in the U.S., crucial to keeping the world economy moving, relies on a stock-market bubble that will not continue indefinitely to defy both the law of gravity and economic rationality. Growth prospects have dramatically lessened in Europe, sweeping away any hope of a significant reduction in the still unacceptably high levels of unemployment. This has the potential to heighten tensions between the imperatives of economic national policies and the policy criteria set by the European central bank. Such tensions will put to the test the stability of the Continent's new currency, the euro, earlier than expected.

Although recession looms large in Latin America, a slow and painful bottoming out of the crisis is occurring in East Asia. But the return to growth will be very gradual, barring any other unforeseen disruption. In this respect, the ability of China to manage the stability-growth-reform trilemma in an increasingly difficult environment is an ominous question mark. In the same vein, the issue of when Japan will start to become part of the solution to global economic woes instead of being part of the problem remains open.

We cannot afford to consider these threats to world prosperity simply as natural expressions of the ups and downs of economic life. The turmoil of the past 18 months reflects the first systemic crisis of the global economy of the 21st century dominated by financial capitalism. It shows how much we are lagging behind in managing the implications and the initial results of the globalization process. And it illustrates the urgency to put in place the structures and the processes that will allow us to manage this new global reality, or globality, in a responsible way.

This is the context that already last spring, led us at the World Economic Forum to make responsible globality the theme of this year's annual meeting in Davos. Of course there have been a lot of comments--gleeful or disappointed--about the globalization process being stalled or even in retreat and looking at the crisis as a setback for global capitalism. The actions taken by some economies to protect themselves from the vagaries of gigantic short-term capital flows swinging wildly on the basis of the herd instinct would seem to be a case in point.

But the problem with globalization is that it will not go away because we don't like some of its worrisome implications or its destabilizing impact. The process is irreversible, if only because of the information technology and communications revolutions. The problem also is that contrary to some illusions, one cannot pick and choose in the package. Even if many governments would like to bar this or that aspect of globalization, or slow down its penetration, doing so amounts to a rearguard battle.

The real issue is how to manage the implications of the globalization process and turn it into a historic opportunity for greater wealth creation and distribution, into a tool for larger integration in the world economic system. That is especially important for regions that so far have been left on the sidelines and are condemned to oblivion and despair--maybe even violent revolt--if they are not given a chance and the means to integrate themselves into the world economy.

Within this challenge is a range of issues that conceptual or political tinkering alone cannot solve. We now know that the role and modus operandi of the IMF and the World Bank must be substantially revisited in view of the realities of the new environment created by the increasing global role of the emerging-market economies. It would not be sufficient to transform the IMF into a lender of last resort at the global level. Such a move would also require the elaboration of a broad consensus toward a new global financial infrastructure that will ensure a smoother and more transparent functioning of the institutions and a better ability to identify potential crises and contain them.

In the same vein, we have to make sure that we address the issue of containing the destabilizing impact of hedge-fund activities and of the huge flows of short-term capital moving at lightning speed. The worst outcome would be to let the momentum on that issue dwindle.

But a new global economy also requires different structures for policy coordination. The enhanced role that emerging-market economies play in the global system calls into question the relevance of the present Group of Seven structure of world economic summitry. As events and decisions in Brazil, China and East Asia contribute heavily to stabilizing the economic system or wreaking havoc on it, it is about time that an economic and monetary policy coordination structure be put in place that integrates the new important players--even if this means that some members of a previously exclusive club will lose their privileges.