Getting to know Larry
"Thailand is not on our border." That is how Larry Summers explained the US refusal to fund the Thai rescue package in 1997. It was refreshing. None of the diplomatic stuff about always supporting an old friend. Just a clear-eyed recognition of US interests.
At that time, Larry was deputy to the US treasury secretary, Robert Rubin. Now he is the successor designate to one of the world’s most powerful posts. He is also a very different kind of man. Rubin and Alan Greenspan have been good mechanics, focussed on stopping the crisis at the borders of the US economy. Larry is something more. He was snatched by Clinton from a stellar academic career. Larry is a thinker.
Like the other two musketeers, he is an American supremacist and a hard-line free marketeer. He calls the US "the world’s only economic superpower" and likes to repeat Clinton’s phrase, "the indispensable nation". He believes that capital should be allowed to move freely around the world. He is frank that this is very much in the USA’s best interest. ‘Countries will only enjoy the benefits of a truly global marketplace if our [financial] firms are given greater access to their markets’, he said on the day after Thailand agreed its first package with the IMF. He accepts that the Asian crisis came about because countries liberalised their financial markets too quickly. But he rejects outright any capital controls or "ingenious" techniques for moderating international money flows.
But unlike Rubin and Greenspan, he doesn’t argue that the free flow of capital will magically bring greater good to everyone in the world. He recognises that it is a little difficult to dress up the self-interest of the international banker as the common self-interest of the world. Consider the ordinary US citizen, who has voted for labour protection laws, social security systems, and environmental protection in the US. How does he feel when US capital goes off somewhere where the absence of such laws makes the profits higher? Larry sees this as a global problem: "As capital becomes so much more mobile than labor there are legitimate concerns that companies will exploit that greater mobility by playing off competing jurisdictions against one another. The fear is that we will find ourselves in a race to the bottom - a bottom in which governments cannot promote fair taxes, uphold fair labor standards or protect the environment. That is not the world we want to build."
Larry thinks free capital mobility is good, and he calls this "integration". He also recognises that individuals are concerned that government should help improve their welfare through labour rights, social insurance, and longer-term measures like environmental protection. He calls all of this "insurance" or "public purpose". Finally he accepts that people like to elect their own governments and have a say about things like their taxes. He calls this "sovereignty". The problem of economics, he believes, is that while it is easy to have any two out of the three (integration, insurance, sovereignty), it is very difficult to have all three at the same time.
This is hard enough in the US alone. Corporate leaders want integration and sovereignty and are happy to sacrifice insurance. Protectionists want insurance and sovereignty and couldn’t care less about integration. On a global scale, this problem is even more complex. Larry has noticed that countries have bridled at the "integration" forced on them by the IMF on grounds it interferes with "sovereignty". He attributes this to "the widespread sense that international integration interferes with governments' ability to deliver the benefits the citizenry want. That is why the development of approaches that can reconcile integration, public purpose, and sovereignty is so profoundly important for the future."
The answer, Larry believes, is to make other countries see that what is good for the US is also good for them - in his own words, "to finesse sovereignty problems by highlighting the national benefits of internationally congenial behavior". Other countries should understand that it is in their interests to have financial, social and other systems just like those in the US.
The financial part of this is the least problematic. Larry argues that capital will be able to flow more freely if accounting standards, banking rules, supervision methods are the same all over the world. The IMF is already pursuing this agenda. But Larry wants to extend this same internationalisation to labour standards and environmental laws, and ultimately to tax regimes and social welfare provisions. This is the modern version of the "civilising mission" of the 19th-century colonial powers.
This is not just theoretical. On October 30 last year, the G7 accepted the principle that conditions attached to IMF assistance packages should be expanded to include trade liberalisation, government budget allocations, labour laws, social legislation, and good governance. The IMF’s board has not formally accepted this idea. But things are already happening. Korea was made to promise never again to indulge in the "directed lending" which had been a key policy behind its unparalleled growth record. Brazil had to promise not to raise tariffs. Indonesia had to undertake labour reforms. Larry is very happy about this. "Some of these ideas or approaches are not yet widely accepted within the IMF," he admitted recently, "but I am able to report that in a number of key instances in recent months we have been able to make a difference in areas of particular importance to the United States".
The last phrase is telling. In Larry’s mind, the US interest and the world interest are the same thing. The best route to banking reform in emerging economies, he argues, is "greater opening of domestic financial market to foreign providers of financial services - and the experience and greater diversification that they afford". Reporting back on efforts to reform the IMF, he boasted that "the United States has made real progress in furthering some key American values".
Still Larry knows that it will not be easy to persuade other countries to accept this identification. One thing on his side is the export of American economics over recent decades. Larry rejoices: "Just think of the Berkeley Mafia in Indonesia, the Chicago boys in Chile, and the MIT and Harvard graduates who have played such a large role over the last decade in Mexico and Argentina." He and Tarrin share a connection to Harvard.
Behind Larry’s world mission there is a simple imperative: "The major industrial nations are crossing the threshold into an era of rising rates of retirement and much lower rates of labor force growth… All of the world's population growth over the next 25 years - and the lion's share of its growth in productivity - will take place in the developing countries." The US needs to be there. And with Larry Summers in the top economic job, we can be sure of increased efforts by the IMF, WTO and World Bank to make the rest of the world seem more and more like home.
But is it always true that what is good for the US is good for the world? The old colonial powers argued that small countries should surrender their sovereignty in return for the benefits of "civilisation". The language has changed (from "civilisation" to "good governance"), but the message remains the same.