|Lawrence H. Summers, Secretary of the Treasury|
Remarks to the Confederation of Indian Industry
Mumbai, India, January 16, 2000
Released by the Department of the Treasury, Washington, DC
Text as Prepared for Delivery
The United States and India in a New Global Economy
Thank you. I am delighted to be here. A strong United States relationship with India takes on increasing significance today, because of the importance of building consensus between industrial and developing countries on how to shape global integration; because of the major challenges facing this country as you contemplate a new wave of reforms; because of India's economic potential and the consequences that its emergence will have for global affairs.
After a long period in which India has perhaps not received the global attention that it deserves, that time of comparative world neglect is surely past. The United States and India have concerns in common and equally, some differences on how best to approach them. But by investing in a deeper, many-sided relationship we can hope to better confront the strategic concerns that have been at the forefront of attention in recent years. In that context we expect President Clinton's upcoming visit -- the first by a U.S. President in more than 20 years -- to mark a turning point.
I want to focus today on the most important economic debate that the world will face in the decades to come, one to which the United States and India can make a unique contribution. That is how best we can build a successful and truly integrated global economy.
Let me discuss four issues:
-- First, the key forces that are shaping, a new global economy.
-- Second, the enormous global benefits that this process of integration could bring.
-- Third, the kind of national policies that will be needed to support this kind of integration: in the United States and in India.
-- Fourth, the broader international challenge of building a framework for integration that will make it work for everyone.
I. Three Forces Driving a New Global Economy
Many elements are building a new global economy. But three mutually reinforcing developments are at its center.
First, revolutions in technology
A recent cartoon in an American magazine depicted a small boy telling his friend that what he wanted to be when he grew up had not yet been invented. That captures some of the spirit of this new time. Modern advances in information technology, transportation and communications are taking us to a post-industrial age, with profound implications for economies and societies.
In this new era:
-- Brains matter more than brawn -- how much you know matters more than how much you can lift.
-- Innovation matters more than mass production -- a product's value is measured not in pounds or k
ilos, but by the weight of ideas that went into making it. -- And information matters most of all -- how easily it can travel through the economy and how well it is used.
Second, the spread of market forces
These technological changes, in turn, have helped propel the second key trend of recent years: the erosion of centralized economic controls and the spread of market forces.
It cannot be an accident that Soviet-style communism planning ministries in the developing world and large U.S, corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. Increasingly, the balance of economic advantage has tilted firmly in favor of systems in which economic power and opportunities are more decentralized- - and the skills and ideas of the individual are given greater weight. At the level of individual businesses and national economies, flexibility is winning out over the license Raj. And the capacity to respond to change is winning out over the capacity to dictate it.
Third, global integration
These two trends come together in the third and perhaps most spectacular aspect of the new global economy. This is the beginnings of a global economy that is worthy of the name -- one in which goods, capital and information flow freely across the globe to where they will be most effective in spurring growth.
When history books are written 200 years from now about the last two decades of the 20th century, I am convinced that the end of the Cold War will be the second story. The first story will be about the appearance of emerging markets -- about economies where literally billions of lives, moving toward the market and seeing rapid growth incomes. For the first time in human history, living standards for huge populations have quadrupled or more in a single generation.
II. The Enormous Potential Benefits from Integration
Taken together, this is an event, I would argue, whose importance in economic history can be compared only to the Industrial Revolution and the Renaissance. For business, it means commercial opportunity on a huge scale. For governments it means managing in a single decade changes in the balance of economic power that might once have taken half a century. For the world's people -- it offers the prospect of improvements in health, literacy, and living standards that were unthinkable even two decades ago:
-- In 1997, around 70 percent of the developing world population was living in countries where per capital incomes grew by 3 percent or more -- compared to 44 percent in 1991. Growing at that pace, real per capita incomes double in less than 25 years. Growing at 1.4 percent a year -- the average rate in the developing countries between 1974 and 1990, it would take more than 50 years.
-- Economic opening and market reforms in China have reduced the number below the official poverty line from 250 million to around 60 million, even as the population has grown by close to 350 million.
-- And here in India, the partial opening that took place in the early 1990s has spurred growth of around 6.5 percent per year in the past decade -- compared to around 3.5 percent annual growth in the 1960s and 1970s. One crucial consequence of this progress has been a record increase in national literacy, from 52% to 64%.
The potential for a step-change in the prospects of every nation is palpable. Yet, just as so many are enjoying the new opportunities that this world brings -- millions are falling further behind. At the end of the 19th century the ratio of the average incomes of the world's richest countries to the poorest was 9 to 1. In 1985 the ratio was 52 to 1. Today it is probably closer to 60 to 1.
The question that the world is rightly and increasingly focused on at the start of this new century is whether this trend toward divergence will continue or whether it will be reversed. The answer matters to the people and countries today that are being left behind, because they fear that the trend is irreversible. But it must be an equally large concern for those who are speeding ahead -- because global integration that fails large parts of the world will ultimately fail every one of us.
-- Success will depend, first and foremost, on national policies: whether industrial and developing countries embrace integration and pursue the right policies to make it work for all their citizens. As Robert Lucas has noted, the logical end-point of globalization is not that there should be a larger gap between the incomes of rich and poor countries -- but that there should be none. The divergence we see today is not because more countries are integrating themselves with the global economy. It is because so many countries are not.
-- It will also depend on the frameworks and policies that we develop internationally to support integration and respond to the needs of this very different time -- notably, by deepening and broadening the terms of the relationship between industrial and developing countries.
Let me discuss each of these in turn.
III. National Policies for Successful Economic Integration
The United States We in the United States have been grappling with these changes in our economy and economic life during the past decade. Our success in creating the right kind of environment for resources to flow to new entrepreneurs has made the United States -- like some parts of India are perhaps becoming today -- a place where if you have a sufficiently good idea, you can raise your first $100 million before you buy you buy your first suit.
This, in turn, has rested on our recognition that a new economy is based on old fiscal virtue. By reining in the budget deficit during the past decade we have helped keep long-term interest rates down and growth and job creation up. And we have freed $2 trillion that would otherwise have been absorbed in government paper to instead be invested in our country's future; its businesses, its workers and its homes.
Yet, while these are great successes, perhaps the most troubling aspect of our country's performance, across a wide range of the political spectrum, is our inability to ensure that every American feels included. After a long period when it was not the case, a rising tide has lifted almost all boats in recent years, but some have risen much, much higher than others have.
By working to increase our support for the working poor (which is now ten times higher than it was in 1985), by working to improve the quality of our education system; and by working to meet the basic needs of our children, we are seeking to address this problem of exclusion because it is a moral imperative. It must also be an economic imperative at a time when continued social cohesion will be important to our capacity to move forward.
In part this is an issue of inequality. It is also an issue of insecurity. When Robert Kennedy ran for President in 1968, he spoke about it being a new more dynamic economy because the average American entering the workforce could expect to have 4 jobs over the course of their lifetime. Bill Clinton used a similar formulation in 1992, except the number of jobs had risen to 7. And the pace of change can only be increasing.
We do not have all the answers to the challenge of insecurity and exclusion in this new economy. But they will surely bulk larger in the years ahead. And they will have consequences beyond the United States: because our capacity to create the kind of global integration that it is in so much in cur interest and in the world's interest will depend on our making it work for everyone.
India Here in India, you do not need to look to East Asia or China to see the benefits that membership of this new global economy can bring. You need only look to the explosive growth of Indian IT. I look forward to seeing Bangalore for myself later this week. Along with Hyderabad, Gurgaon, and others, it is truly an embodiment of the idea that the information revolution can bring prosperity and opportunity globally, not just to the few. Like the success of Indian ex-patriot communities in California, New York and the English Midlands before it, the success of firms such as Infosys, Wipro and Satyam says a great deal about the vast potential that Indians' closer integration with the global economy could unlock. At the same time, it also says a great deal about the obstacles that hold the rest of India back. -- The software technology parks created in the early 1990s, have helped the sector to blossom -- but only because they freed it from the tariffs and high tax rates that still prevent the bulk of Indian industry from competing abroad. Exports grew 130 percent in the 1990s. That is impressive, but in China they grew nearly twice that amount during the decade. And China's stock of foreign direct investment as a share of GDP is eight times higher than India's. -- Like the other labor-intensive services doing well in the new India, these firms have also been less hampered by high levels of public borrowing in India and the dearth of affordable private lending that this creates. India's borrowing requirement absorbed up to 40 percent of Indian national savings last year. And 14 percent of GDP that might have been flowing into its growth industries was instead spent on ill-targeted public subsidies. -- Software firms and data processing companies have also been more able to leap-frog the failings of India infrastructure: the clogged ports and segmented transportation networks which mean that goods that take 3 hours to ship abroad in Singapore, in India, take 3 days. Certainly, these new businesses lave been blessed by India's tradition of high quality high education. India's pool of trained scientists and engineers, for example, is second only to our own. Yet the same approach that has brought India its high number of graduates has equally built a country in which more than half of women cannot read. Time and again, we are learning that the highest return investment that a developing country can make in its future is girls' education. But for all its recent progress, India still has a long way to go. Amartya Sen has noted the sobering fact that Indian basic health and education indicators are not merely much lower today than in Korea, Thailand and other East Asian tigers; they are below what these countries had already achieved in 1960. With the election past and a new government now in place, India has the opportunity to take reforms forward again, so that India may take its rightful place in the 21st century global economy. And in Prime Minister Vajpayee and Finance Minister Sinha, it has leaders who have committed themselves to that goal. In this regard, Finance Minister Sinha's plans to re-engineer the budget; reduce the state's pervasive and costly role in the financial sector; and open up key parts of the economy will be especially important. India has been able to grow at relatively high rates in recent years, as the crises in Asian and other emerging market economies have rocked the world. I gather there has been some discussion about whether this in some way reflects India's policy of very limited international financial engagement. It seems to me that India's lack of reliance on short-term capital flows, low level of external debt, and small share of trade in the economy have probably all played a role. But when one considers the wealth of economic opportunities in India and the sheer volume of investment that these will require, it seems equally clear that over time, greater involvement in the global capital market will need to play a role. With a strong commitment to openness, to a more efficient and competitive financial system, and a new role for the state that, in Amartya Sen's terms, works more to complement markets than to exclude them -- with all of these things I would fully expect India to be one of the largest economics in the world in less than a generation. As the government recognizes, developing a more sustainable and coherent framework for fiscal relations between the states and the center will be vital to bringing this about. The 6.5 percent growth rate that you have achieved in recent years is impressive. But 10 percent growth is well within your grasp. At that pace, Indian standards of living would be five times higher in 2020 than they are today. IV. Building the Right International System for More Global Economy The economic historian, Jeffrey Williamson has reminded us that global integration, once begun, is not predestined to continue. Indeed, important features of today's more international economy were present in the late 19th century as well: capital and labor flowed across national borders to an unprecedented extent, aid declining transport costs fueled an explosion in global trade.
In the second decade of the 20th century, this first global economy imploded. Countries embraced autarky and the world entered one of the darkest periods in its history. Opinions differ on why integration was stopped in its tracks. But Williamson is not alone in pinning a good part of the blame on governments -- and their failure to find ways to manage integration's broader effects.
At this second moment of historic opportunity, the capacity to enjoy the benefits of truly global integration will depend on the success we have domestically with our economics -- because that is what will create the security that makes global integration possible. But it also depends on the right kind of broader framework in which integration can take place.
In many ways, the challenge is to reconcile three widely shared objectives:
-- First, realizing the benefits of trade and integration.
-- Second, support of public purpose in areas such as promoting the environment, regulating financial risk, and assuring worker and product safety.
-- Third, allowing sovereign governments to make their own choices and put policies in place that will work for them.
The problem of focusing only on trade was learned within our own country in the late 1800s and early 1900s, as inter-state commerce took off and the national economy began to come together. Over time, politicians in both major parties came to recognize that a greater degree of interconnectedness between states also called for common institutions and understandings at the national level -- to offset the downward pressure on local rules and standards that competition could create.
At the global level, our agenda is to promote free trade, sovereignty and serious global efforts with respect to common problems. It is easy to pursue any two of these if one is prepared to forget the third. It is easy, for example, to support sovereign pursuit of public purpose if one is prepared to wall out the world. And if countries were willing to give up national sovereignty, one could perhaps imagine a world when there would be the same rules for all.
The challenges we will have to manage -- with respect to trade, the environment and many other issues -- will be striking the right balance between all three objectives. The difficulties of doing this were pointed up in the recent WTO meetings in Seattle. But the events of the past several years have equally shown us that there can be no alternative if the benefits of global integration are finally to be captured.
Discussions of international integration used to be the preserve of the industrial countries. With the balance of power now shifting, and nearly all of the growth in the world's labor force now taking place in developing countries, it will be especially important to make these nations a larger part of the discussion. This has been reflected in the financial sphere with the creation of the G20, in which India has such an important role. It will doubtless need to be reflected in other areas going forward if this challenge is to be met.
India and the United States, the world's largest and oldest democracies, have an opportunity to work together to shape the terms of this new global engagement in the years ahead. And we must seize it. We should remember your first Prime Minister's famous words of more than half a century ago:"those dreams are for India, but they are also for the world, for all the nations and peoples are too closely knit together today for any one of them to imagine that it can live apart."
[End of document]
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