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The Implications of a Global Economy

Speakers: Paul R. Krugman, and George Soros
Presider: Leslie H. Gelb, President, Council on Foreign Relations
May 1, 1997
Council on Foreign Relations


Presider: Dr. LESLIE GELB: Welcome to the Council on Foreign Relations. Welcome, members; welcome, our C-SPAN audience; welcome, especially, to our two brilliant speakers tonight, George Soros and Paul Krugman. More about them later.

The Council on Foreign Relations is, even in this age of globalization, decidedly a non-profit organization. We are also an organization dedicated to improving public understanding of international relations, which is why we gather this evening to talk about the global economy. We’re not going to do it in terms of the way it usually gets discussed, namely, globalization of the economy, all good or all bad. We want to look at what is good about it, what is bad and what we don’t know enough to make judgments about at this time.

I want to thank some people who make these debates possible, who work with us on them, because they’re very important to our function as an organization, for ourselves, for our membership and for the wider American public.

I want to thank, first, Home Box Office—HBO—President Jeff Bewkes and Vice President Richard Plepler. I want to thank our own group of wise men and advisory board people, who’ve been working with us on this program to make sure they are in keeping with council traditions; I’m talking about our members Vincent Mai, Tom Hill, Steve Friedman and Steve Robert, and I want to thank Karen Sughrue, our vice president for meetings and media, and her two key people on this, Erika Burk and Irina Faskianos, for the work they do.

Our speakers tonight couldn’t be better chosen to help work us through this problem of what’s good and what’s bad about globalization.

Paul Krugman is Ford professor of economics at MIT. He’s been a professor at Yale and Stanford, a chief international economist at the Council of Economic Advisers, author of many, many, books and articles—a scholar of real renown, and now also a columnist on the Internet Slate magazine in a column appropriately titled The Dismal Scientist.

And our other speaker, George Soros, well-known to you all as a philanthropist and serious intellectual, also the author of many books; a man who has made a lot of money and given a lot of money away.

The procedure tonight in our conversation will be that each speaker will talk for 10 minutes and then address each other, comment on each other for two minutes, then the three of us will have a conversation for a few more minutes, and then we’ll open the floor to questions from you all.

George, will you begin?

Mr. GEORGE SOROS: Yes. Well, I’ll start with a rather obvious point, namely, that we do live in a global economy. Our exports and imports, taken together, may not account for more than 25 percent of the economy, but that isn’t an adequate measure of our involvement, because our financial markets have become truly international, and movements in interest rates, exchange rates and stock prices are intimately interrelated in the various countries of the world. And in this respect, the character of financial markets has changed out of all recognition during the 40 years that I have been involved in them.

My second point would be that global integration has brought tremendous benefits, not only the comparative static advantage of comparative advantage, which is adequately demonstrated in economic theory, but dynamic benefits such as economies of scale associated with global markets and the spread of innovations which spread from one country to another.

Equally important are the non-economic benefits, the freedom of choice associated with the international movement of goods, capital and people, and the freedom of thought associated with the international movement of ideas. To appreciate these benefits, I don’t think we should compare the United States today with what it was 40 years ago, but rather, compare what it is like to live in an open society, compared to what it is in a closed society, like the Soviet Union was or Burma or North Korea today.

We don’t enjoy the full benefits of a global, open society, because a global economy doesn’t automatically produce democracy and the rule of law. But even countries like China and Indonesia and Singapore are more open than they would be if they were not integrated into the global economy. So we can say that the global economy is highly beneficial and desirable, even if it’s not the be-all and end-all.

My third point is that the global economy is not without its drawbacks. Moreover, the benefits are unevenly distributed. There is a definite disparity between the position of capital and labor, and there is an asymmetry in being at the center of the global economy and being at its periphery. There is some question as to where the center is. One could argue that the center is in New York and London, because that’s where the allocation of capital is determined, or, alternatively, it resides in the central banks of the United States, Japan and Germany, because that’s where the cost of capital is determined.

Or, alternatively, one could say that the center is offshore, because capital almost always moves to where it is least exposed to taxation. It is the ability of capital to move from country to country, and particularly to move offshore, that gives it an advantage over labor. Moreover, financial capital enjoys a greater advantage than direct investment, and this is a source of instability in the global economy because financial markets are notoriously unstable.

So there are winners and losers, both among countries and among various interest groups inside countries, and there are instabilities built into the system as a whole, and this renders the present situation precarious and vulnerable. What makes it more precarious is that the shortcomings of the system are not properly appreciated. There is a widespread belief that markets tend towards equilibrium and market excesses tend to be self-correcting, and the less the government interferes, the better.

These laissez-faire views are held mainly by those who have come out on top in the competition or intend to do so, but it doesn’t make them right. What makes the laissez-faire ideology so dangerous is not that it is totally wrong, but exactly that it contains a large element of truth, but in a one-sided and distorted way, and to the extent that it prevails, it reinforces and exaggerates the deficiencies of the global economy. If the deficiencies were recognized, they could be corrected by various forms of international cooperation, but that is definitely not the prevailing mood today, particularly not in this country.

As it is, those who are adversely affected have no recourse but to opt out and turn protectionist, inviting mutual retaliation, culminating in an eventual breakdown. And the breakdown may manifest itself in the financial markets, but it is more likely to find expression in a political or even in a military way. I’m not predicting an inevitable collapse, because there’s always a chance that the prevailing view will be modified in the light of experience. But I am warning against the current euphoria, apart the market mechanism.

If you look at the historical evidence, we find that there is nothing unique or unprecedented about global markets. Most of the 19th century can be described as a global economy, and it was a period of great material prosperity and advancement. The arrangements which prevailed in the 19th century were, in many ways, more stable than those which prevail today. For one thing, there was an imperial power, Great Britain, which derived sufficient benefits from being at the center of the global economy to make it worthwhile to maintain a fleet which could be dispatched to faraway places to maintain peace. Secondly, there was a universal gold standard, whereas today we have three major currently blocs which fluctuate and clash against each other like tectonic plates.

Nevertheless, the global economy came to an end in the First World War, and its destruction was completed in the Second World War. By the end of the Second World War, there were practically no international capital movements, international trade was at a standstill, and there were widespread shortages. The Breton Woods institutions were established in order to facilitate international trade and investment in the absence of private capital flows.

Now the global economy is once again flourishing, and capital movements are larger and faster than ever before. But the system could easily destroy itself because of our failure to understand how it works.

In conclusion, I’d like to commend to you the concept of open society, which is based on the insight that we act on the basis of imperfect understanding, and all our concepts and all our institutions are deficient in some way. And what is imperfect can be improved, and I contend that the concept of open society provides a better basis for preserving and increasing the benefits of the global economy than a blind faith in the magic of the marketplace.

Thank you.

Dr. GELB: Thank you very much, George Soros. Paul Krugman.

Mr. PAUL KRUGMAN: I’m not sure, in the end, how much of an argument we have, but let me, like the characters in Monty Python, do my best to provide one.

Actually, let me begin by conceding some points. Whatever else you may say about the economic system we’re discussing tonight, it is neither lovable nor inspiring. There is something inhuman about the global economy, if nothing else because nowadays your livelihood can depend upon the whims of people that not only don’t you know, but you can’t know, because they live half a world away. And also, a market economy does make disappointingly few calls on our nobler instincts. It is a structure built out of that commonplace substance, the individual desire for gain.

But Winston Churchill famously said that democracy is the worst form of government, except that all those forms which have been tried from time to time. Capitalism should be judged by the same standard, not by comparison with the way things ought to be in an ideal world, but by comparison with other systems that might be and have been tried.

Not too long ago there were several rival economic ideologies competing to shape the world economy—not just Marxism, but ideologies that championed inward-looking development, a new international economic order and so on. What’s happened since is the acceptance by most of the world of the idea that the most effective way to achieve economic progress is by harnessing the profit motive, and that this strategy works best when domestic markets are closely integrated with those of the world at large. And when we’re asking whether we’re for or against global capitalism, what we’re really asking is whether this sea change in ideology is for the better.

Let me state it flatly: The human race has never had it so good. I don’t mean that GDP is up, although it is—monetary statistics are not the point; nor do I mean that there are more rich people out there; that’s not necessarily a good thing, even for the rich themselves. I’m talking about the most basic essentials, about things like whether people have enough to eat, and the fact is that capitalism, as it’s now practiced, has delivered those essentials to more people than ever had them before. That can seem hard to believe. You look at a country like Indonesia, and what you see is not pretty. You see a small elite living in luxury while many people are still desperately poor—in fact, almost a third of children are still underweight. And you say, ‘Look at the terrible things that global capitalism has wrought.’

But global poverty is not something that was recently invented for the benefit of multinational corporations. Turn the clock back a generation, and you see an Indonesia in which well over half of children were malnourished. Indonesia, as a case, like many of the emerging-markets countries, has always been a country so poor that you can measure the status of its people by the crude question, ‘How much are they getting to eat?’ Well, in 1970, per capita intake was 2,100 calories per person; today, it’s 2,900.

Because that experience—that very raw, crude improvement in the very basics of life—has been replicated for so many people in so many places, this represents, by any standard I can think of, a vast improvement in the human condition. And what’s the source of that improvement? It’s the availability of opportunities provided by the global economy. In effect, Indonesians and Thais and Chinese and even Bangladeshis are doing better than anyone expected 20 years ago, not because anyone lifted a finger to help them, but because it turns out to be profitable to employ them at 60 or 50 or 40 or even 30 cents an hour, making shirts and sneakers for you and me.

And yet global capitalism is the subject of intense criticism, much of it fueled by moral outrage. Some of the critics of global capitalism are just selective in their vision. They focus on the millions of people who have been hurt by shifting economic tides, and there are many such people, although not as many as some of the critics imagine, and they ignore the hundreds of millions of people for whom the global economy has made the difference between mere poverty and sheer desperation. Other critics insist that some other economic system could have achieved the same progress that ours—this system has, without the inefficiencies and the brutalities, even though over the last half-century we’ve seen experiments with a wide variety of other ‘isms’ besides this ism, with results ranging from disappointing to disastrous.

I find it easy to talk about such attacks on the global economy, because they are attacks on the system we have, and they can be answered pragmatically by focusing on what capitalism has achieved and the alternatives have not. My debate with George Soros is a little different, at least as I understand his views, particularly from reading some of his recent writings, because his critique is not, as I understand it, really a critique on the actuality of capitalism. It’s an attack on a sort of ideal type of capitalism. What Mr. Soros attacks is not the practice of capitalism, but what he asserts to be its underlying principle, an ideology that says that completely unrestrained and unmodified markets are always best, that market prices are the only test of value.

What’s puzzling about that attack is that it’s so abstract. I think it was Russell Baker who once wrote a column about a conversation with one of ‘those who,’ you know, as in those who think that we should coddle criminals. As far as I can tell, this is a debate with ‘those who’—with those who think that the market is always right, with those who think that market values are the only values. My problem is that I don’t know any of those who. Certainly they don’t run any actual countries, even in the United States, which is the most anti-government and pro-capitalist of advanced nations, too much so, to my taste. The state still sees fit not only to collect about a third of national income in taxes, but also to impose a huge array of regulations governing pollution, health, safety and so on. There are some people in this country who would like to do away with much of that government role, but the body politic has made it very clear that it likes things pretty much the way they are.

George Soros has particularly hard words for economists, whom he apparently regards as the intellectual shock troops of ‘those who’—that is, he believes that economic theory claims that the market is always right and that this claim has persuaded the rest of the world. On behalf of my profession, I would like to say that this is very flattering. My impression is that economists don’t matter nearly that much, but it’s nice to have somebody think that we rule the world.

However, I have real trouble recognizing that description of what economists are supposed to believe. Perhaps I should say that I often have that problem. Many attacks on economic theory are based on hearsay evidence, on what people think they remember, having heard about it. In particular, if economists think that the market is always right, why does every—and I mean every—textbook on economic principles devote several hundred pages to ways in which markets fail and to economic rationales for government intervention?

I think I know what the answer would be, which is that, even though the actual practice of economic policy in capitalist nations right now—there is little resemblance to the purist ideology that George Soros describes. Even though what economists actually write and teach bears little resemblance to the doctrine that the laissez-faire doctrine that he asserts they champion. He would, I believe, say that the essential tendency of both capitalism and its economists is nonetheless towards an unlimited exaltation of market outcomes and values. At least that’s what I make of the argument.

The problem is that that sort of claim is basically impossible to argue with. There are some people in this country who believe that the government has no right to force people who operate motor vehicles to take driving tests and carry insurance, because any restriction on liberty, no matter how innocuous it may seem, is essentially tyrannical. What can you say to that beyond ‘Oh, come on’?

What is the essence of global capitalism? I don’t know, and I’m not sure that I care. I think George Soros and I share something of a taste for philosophy. Let me quote the American philosopher Daniel Dennett, who says, ‘Nothing complicated enough to be really interesting can have an essence.’ The global economy is certainly both complicated and interesting, so searching for its essence or, might I say, its center—I’m not sure I know that it has to have a center, but searching for the essence of global capitalism is, in my view, a waste of time. We can try to construct simplified models of how some aspects of that system actually work; that’s something quite different and altogether more practical.

I’d like to say that, in addition to all his good works, George Soros has—is certainly doing us a service by warning us, as we do need to be warned, that no economic system or doctrine should be taken as the last word, that we must always be prepared to question our premises. But when it comes to the specific charges against both the global economy and against the economists who try to make sense of it, I have to admit I’m not quite sure what he’s talking about.

Dr. GELB: Thank you, Paul.

Mr. SOROS: May I respond?

Dr. GELB: George Soros has two minutes to comment, and then Paul Krugman will have two minutes to comment.

Mr. SOROS: Well, I’m not a very observant person, but I can see that I’ve rubbed some economists the wrong way. But let me try to make the point that—because, you know, we have talked about Indonesia and a wonderful country that is and what a contribution that is to, you know, about the liberal—how far it’s advancing and so on. Of course, there are some problems in Indonesia which are political problems and there is a great sense of instability because of the political problems.

You talked about a moral outrage that people feel, and let me say, you know—I’m trying to formulate it, and let me try to put it this way: I think that there is a difference between human values and economic values. They’re not necessarily in conflict, but economic values are just one segment of human values, those which can be, let’s say, used in exchange—in an exchange process can be reduced to monetary terms. And I think there is more to humanity than just exchange and production and consumption, and that more is left out of the economic analysis.

Now the market mechanism is an extremely efficient mechanism for letting these—as we call them market values—be maximized, because you know, everybody’s out for himself, and there is a very good way that through exchange you can maximize it. In the international trade, of course, you have, you know, comparative advantage and it’s all very good. But there are those other values which get, actually, short shrift. Now they should be expressed in a political process. It’s—social values, they ought to find expression in a political way. It requires for people to agree among themselves. They need to cooperate in some way, which happens in—of course, in individual countries, there is often a social consensus and there are institutions to express that consensus.

But given our imperfect understanding, there is no absolute as to what is right and what is wrong, and so the expression of right and wrong is superceded by what works, what is effective. And that is where, I think, we are now in trouble in the world. I’m supposed to stop, so...

Dr. GELB: Thank you, George.

Paul. George, why don’t you remain standing, please. Two minutes, Paul.

Mr. KRUGMAN: Sure. I guess the problem I have is, again, I’m not sure to whom that complaint is addressed. It’s not—again, let me talk both about practice and about theory here, theory first. I don’t know any economist or, for that matter, any person who believes that the values of the market are the only values. There are—no, I can actually—Jude Wanniski probably does, but the rest of us—the rest of us do not. We think that these things are—that the market is a mechanism to be used. It is not the source of value. It is a way to be used within its limits, and note, there are very definitely limits.

In practice, I look at the advanced countries, certainly, and see that, once again, the United States, which is at the bottom end of the scale, still has an extraordinarily large government sector. We actually—again, about a third of national income passes through the government’s hands. We have an elaborate safety net for almost everybody except the poor, which happens to be the American thing, that we care for the aged and the handicapped and everybody except the poor, and obviously, I don’t sympathize with that, but what strikes me as astonishing is that so many people can look at the really quite minor moves towards giving the market wider rein advanced countries and say and talk of it as if it was an apocalyptic shift towards a purely market-oriented set of values. You will hear this, for example, in France. People talk about how the global market is taking over; we’ve abdicated the role of society—this in a country where the government spends 54 percent of GDP.

So that seems to me to be very much a straw man and not really what we should be arguing about. I think it says that I was right in saying that what you are really attacking is an ideal type of capitalism, not the thing itself.

Mr. SOROS: Well, I have to take issue with you when you call it a straw man, because, certainly, as you become as a state, let’s say, loses the ability to tax capital, it loses the ability to provide the social services that it has provided in the past. I’m not defending the social services in France, but there’s—definitely global competition has—coupled with laissez-faire ideology—has reduced the power of the state, and even though the public sector has been growing from, let’s say, before the First World War, it was 20 percent; in around 1990 it was close to 50 percent of the industrialized countries. It has peaked, and it is now declining. And there is no international structure to preserve stability in the financial markets, and particularly in security, and there is a general rejection, you see, of state interference, which is felt even more strongly when it comes to international cooperation. So it is not a straw man.

Mr. KRUGMAN: Let me just focus in on one point, which is the supposed loss of the ability of the state to raise revenue. That’s certainly not obvious in any country in the First World that I know of. I’m not aware that any of the problems that are taking place are the result of inability to collect taxes; in fact, all of—you know—or—the tax take of as a share of GDP is up in most of the advanced world. The mobility of capital: well, I actually think that’s overstated. I think it’s a big—you have to make a big distinction between the huge short-term flows of hot money and the relatively limited actual transfer of savings to finance investment in other countries.

But in any case, taxation of capital has never been the major source of income for governments.

Mr. SOROS: Well, let’s face the fact that in Europe today you’ve got 12 percent unemployment, and there are, of course, very heavy taxes. Employment is taxed by—at the rate of 200 percent, in effect, because when you add together what the employer and the employees have to pay, it adds up to 200 percent, which means that capital will not go into those countries. Germany, for instance, which is now—German industry is becoming much more efficient, but is not investing in Germany, but is going to Eastern Europe or Asia. Now I’m not defending, of course, the social security system in Germany, but to say that there is no problem, that there is no clash between social values—whatever they are, whether they are right or wrong—and economic values, and that this conflict or divergence is sharpened by international competition—I think that is—that, I have to insist.

Dr. GELB: Quick response, Paul.

Mr. KRUGMAN: Just to say that I’m one of these boring people who kind of insists on the aggregate numbers, and the aggregate numbers say that Germany is, on net, the slight importer of capital, that, while there may be individual German firms moving money out of the country...

Mr. SOROS: Germany has over 10 percent unemployment. That’s the point. And it’s pretty, at the moment, endemic.

Mr. KRUGMAN: I don’t think globalization has anything to do with that.

Dr. GELB: While we’re pondering whether it does...

Mr. KRUGMAN: I can continue with that.

Dr. GELB: ...I’ll...

Mr. KRUGMAN: In fact, I can talk for hours about that if you want.

Dr. GELB: Let me ask you a question, George, and then one for Paul before we open it up to our audience. George, I know George Soros, and you’re not being George Soros tonight. When you wrote the Atlantic article something was really troubling you, and usually abstractions—while they bother you, that isn’t the heart of it. We’re talking about stability tonight and challenges to an open society. But you’re not exercised simply by those abstractions. What is really troubling you about the effects of globalization?

Mr. SOROS: Well, I’m concerned that the system is unstable, and I’m conc...

Dr. GELB: What does that mean, concretely?

Mr. SOROS: Well, you know, financial markets are inherently unstable. I don’t know whether we’ve agreed on this point. I think we probably would. But certainly, that is not the accepted economic doctrine. The economic doctrine holds, you know, rational expectations and what have you—equilibrium and tendency towards equilibrium. So the theory, I think, in this particular field, is wrong. I agree with Paul, that the practitioners are actually much more aware, and I think that the sort of policymakers in Washington are much more pragmatic. But the theory is wrong.

Mr. KRUGMAN: Boy, boring economist remark: There is more to the theory than the stuff that’s in than supply and demand. The actually, I have a particular interest in this. The very first real paper in economics I ever wrote, 20 years ago, was something called “The Model of Balance of Payments Crises.”

Dr. GELB: This is when you were four?

Mr. KRUGMAN: Yeah. Which was about why you have gigantic speculative attacks that’ll exhaust billions of dollars of reserves in a matter of days, and at the time it was focused on the breakup of the Bretton Woods system, and I thought that those massive attacks were the last we’d see of that kind. I thought of it as a paper that was historical exercise. And fortunately for me, anyway, I was wrong. Every time one of these crises happens, it bops up my citation index, which is all to my good.

In fact, there’s actually a very active discussion among economists, in particular, about the possibility of self-fulfilling currency crises, crises in which the market basically generates the conditions that validate the attack. These things happen, but I think it’s important not to take too much of a financial market’s eye view of the world. There is a constant froth of instability on the markets, in the same way that there is, for example, constantly changing weather. But that doesn’t mean that the underlying system is totally unstable or totally unpredictable.

Dr. GELB: Paul, permit me to interrupt you for a moment. And could I ask you both to speak directly into the microphones, please? Just to follow up one more time, George, you talk about globalization’s threat to the open society. Again, concretely, what is worrying you?

Mr. SOROS: Several things that I just mentioned. One, I think the inequalities, the instability, and, actually, I’m very concerned about the political—the lack of institutions and arrangements to preserve peace and security in the world. But that gets us into a different subject and I don’t want to...

Dr. GELB: OK. Let’s wait on that, then.

Mr. SOROS: But that’s—yeah, I don’t want to...

Dr. GELB: Now, Paul, I noted your column on the Web, The Dismal Scientist, but you didn’t sound very dismal to me. Really, when you talked about the market mechanism, the effects of globalization, you seem to think that’s almost all pretty neat, pretty effective, and that it’s politics getting in the way of economics that causes the problems. Was I hearing you right or wrong?

Mr. KRUGMAN: I think it’s about 80 percent right, and that’s a carefully chosen number.

Dr. GELB: That’s closer than I usually get.

Mr. KRUGMAN: There’s no question—look, the major downside I see on globalization is that it is a contributing factor to the downward pressure on unskilled labor in the advanced countries. Now a lot of people have put a lot of work into trying to estimate that, me included, and I think it’s definitely a secondary factor behind other things, but it’s there, and that is, after all, our biggest social problem, and so it is an important part of what goes wrong. But if you step back and take the planetary view, take the—if you like, the—well, the rootless cosmopolitan view, where you ask about the human race as a whole, on the whole it’s been a very, very good thing, and that’s what I think ought to be emphasized first in this kind of forum.

Mr. SOROS: Well, I think that I did emphasize it...

Mr. KRUGMAN: Yeah.

Mr. SOROS: ...and I want to emphasize it again. And I’d just like to make sure that it will work and it can be sustained, and for that we need to recognize that it is deficient, and we have to try to fix the deficiencies. That does involve us in politics, and I think the politics is a much more imperfect mechanism than the market. But you can’t get away from it.

Dr. GELB: OK. Let’s turn now to our colleagues in the audience, and ask them to raise their hands, wait to be identified, wait for the microphone, please, ask your question—no speeches—and then we’ll let our speakers continue. Questions over here, would you please stand, identify yourself—brief question.

Mr. LARRY FINKELSTEIN: Thank you. Thank you very much. I’m Larry Finkelstein. There isn’t time to labor this, so let me put it simply: In both talks, I missed the role of technology as part of the complex of causation. In the case of George Soros, you spoke of remedial measures that might be available internationally to make things better. I wonder whether the agility that technology gives to profit seekers affects your hope in that respect adversely, in the sense that you would need an enormously complicated, very powerful international system or set of systems to control individual profit seeking. In...

Dr. GELB: No double questions. Let’s respond to that one. Go ahead, George.

Mr. SOROS: No, I didn’t say that the dynamic benefits of a global economy is technological advance, and you actually have the sort of increasing returns if you capture the world market, and that, actually, is one of the problems about free trade, that it’s worthwhile to subsidize an industry in order to capture the world market. And the best example today is Korea, that has gone broke wanting to capture the DRAM market.

Dr. GELB: Would you talk into the microphone, George, please?

Mr. SOROS: Korea has actually practically—I mean, didn’t go—it went for broke and nearly got there trying to capture the DRAM market, and as a result, they had to put pressure on labor because they were priced out—they had a balance-of-payments problem. So technology, I think, is, generally speaking, a positive benefit, and we live, at the present time, a period of rapid technological advance, which is greatly helped by the fact that we are a global economy.

Dr. GELB: Paul, a brief comment.

Mr. KRUGMAN: Yeah. My view is there are two crucial technologies that make a global economy possible, and they are the steam engine and the telegraph, and everything since then has been just icing, and that there is, therefore, no—there’s nothing inexorable about this globalization. After all, the same technologies that the private sector can use to dance around the government, governments could use to keep tabs on the private sector. If we choose not to, it’s because we have an ideology—I’ll grant this—that says that we want to give the private sector a relatively loose rein. I don’t think that this globalization is at all inexorable, and I think it would be surprising if we did not have, somewhere in the next century, a period of retrogression because governments do decide to step on it.

Dr. GELB: Henry, did I see you have a question here? Identify yourself, please.

Mr. HENRY KAUFMAN: Henry Kaufman. I guess I should speak to George. George, isn’t it the obverse that it’s the rigidity of continental Europe, the social structure, the business structure, the regulation, the kind of close cooperative attitude between business, labor and government, that is really the concern and the problem, and not the other side of it?

Mr. SOROS: Yes, it is. I agree with you. I think that Germany and France are in the—you know, left with a social security system which is inappropriate in a globally competitive economy. But I think that there are also—and an inverse side of that is that you have, let’s say, competition from China, where labor has absolutely no mobility. They are practically kept indentured. There’s a very shocking article in Foreign Affairs pointing this out. And that is the competition that is forcing France and Germany to change their system, but I think they must change their system.

Dr. GELB: Question here. Microphone is coming.

Mr. DAN YERGIN: I’m Dan Yergin. I’d like to ask the two speakers to clear up a confusion. You’ve been talking about, of course, the movement of the market around the world. Does that apply to the United States, or aside from economic deregulation, in terms of social or social-value intervention in the marketplace, is that decreasing or increasing in the United States?

Dr. GELB: Paul, would you start?

Mr KRUGMAN: Boy. I mean, we’re becoming savage to our poor; otherwise, I can’t see much change. I don’t see any significant reduction in social regulation, and nothing in the changes in US politics or policies is driven by the global marketplace. If you just think about what is causing things to change in this country, there are some effects in the market, but if you ask what of the political decisions that we’ve made is actually being driven by external forces, I can’t see anything. The United States is, I think, the case in point to show that a country can follow its own way if it chooses, regardless of the global market.

Dr. GELB: George, comment.

Mr. SOROS: I think that the American economy has been the most successful in adapting to a global competition, but one of the prices we are paying is that there is now a shrinkage of funds available for social purposes, and that is one of the way we have adjusted, and it’s one of the reasons why we are successful, but you can question whether this is, in fact, you know, on a human level, the best. However, it is the most effective.

Dr. GELB: Question over here to my right.

Mr. ANDREAS LOWENFELD: I’m Andreas Lowenfeld. I’m not sure whether my question is about moral values or economic values, and in fact, that is my question. And I’m not even sure whether it’s a global question. Why are we so worried about budgetary deficits, and why is one country why do the Japanese care about America’s budget deficit, or the Germans?

Mr. KRUGMAN: I don’t know. It’s a—boy, it—it—partly it’s just become a symbol. The difference between 1 percent of GDP deficit and 0 percent, macroeconomically, is nothing, and it’s the question of whether getting—squeezing the last bit out of the US deficit right now. The only thing to say is that we do have a long-term problem of both an aging population and, much more than that, a steadily rising medical costs on elderly people, so the US has to worry, in some sense, about where the money’s going to come from 20 or 30 years from now. That would be the only reason to worry right now. Europe had the same problem.

Dr. GELB: Please—question here on my right.

Mr. MARK DANNER: Mark Danner. Everyone in this room paid substantially...

Dr. GELB: Did you identify yourself, Mark? Oh, OK.

Mr. DANNER: Yes. Mark Danner, still. Everyone—everyone in this room...

Dr. GELB: It’s all anticlimactic after that, Mark.

Mr. DANNER: Everyone in this room paid substantially a couple of years ago for the $2 billion or so it cost to occupy Haiti, and though you wouldn’t know it from the newspapers, there’s a low-level civil war going on there right now. The solution that was applied after the troops left is known in Haiti and in the rest of Latin America as neo-liberal economics. That is you slash the government payrolls rather severely. You eliminate government national industries and you switch to a system in Haiti, for example, which Mr. Krugman referred to as making sneakers and T-shirts for us—for the United States. Unfortunately, the Haitians, being rather severe nationalists, like many other countries, don’t—many of them don’t particularly like this. And as I say, there’s an enormous—it’s a very fertile political issue. There’s an enormous and growing...

Dr. GELB: Is there a fertile question in here, Mark?

Mr. DANNER: There’s a fertile question. Excuse me. There’s a civil war going on and I’m wondering—it seems to me this demonstrates rather clearly Mr. Soros’ point, which is that these are not simply economic questions, they’re political ones. I wonder, indeed, how you can define the limits of the economy in the way that you have when you look at, particularly, Third World countries.

Mr. KRUGMAN: I guess that’s for me. I guess the short answer is to say that it may seem demeaning for Third World countries to be hewers of wood, drawers of water and sewers of sneakers for the advanced countries, but what, exactly, is the alternative? I actually did a surreptitious thing this afternoon, which was I took a peek at the collar of my own shirt, and it is made in Costa Rica, and I’m sure if I visited the factory in which that shirt was made the conditions would be appalling and the wages would be, maximum, 60 cents an hour. Now I’m also sure that if I traveled around the back country of Costa Rica I’d discover that that factory was a lot better than the alternatives that are available to those people. And I discovered that Costa Rica’s doing a lot better than other countries that don’t have factories making shirts for this market.

If you are prepared to produce, as a realistic prospect, some other strategy that will give these people some hope; if you are prepared to find some hundreds of billions of dollars of true foreign aid for the Third World and some way to give that aid without creating permanent dependency, then you have a case. But this is the only route we’ve found. This is a very hopeful world, much more so than the one I remember 25 years ago, where it seemed that the ranks of the developed countries were closed permanently.

Dr. GELB: George...

Mr. KRUGMAN: That’s no longer true.

Dr. GELB: George, this is a very central point that...

Mr. SOROS: Yeah.

Dr. GELB: ...Paul is making, that whatever the inequities may be, that on the whole, a globalization is producing jobs and a better way of life than what we had before.

Mr. SOROS: I think it’s a—Haiti is not a good country to look at, because I think it’s too chaotic. I think if you look at China, it’s probably a better example. Economic theory tells us that it really doesn’t matter how goods are produced in China, because through trade we all benefit. And economic theory is valid in that sense. But there are, I think, other values that do come in and, you know, let’s say, child labor, indentured labor—I mean, restrictions on the mobility of labor which keeps labor particularly cheap I don’t think should be accepted on a—not on economic grounds, but on human grounds, and even to keep the system stable, I think that let’s say we have, in the advanced countries, certain labor standards, and those are endangered by competition from—let’s say unfair competition from—from labor which is mistreated.

Dr. GELB: Thank you. Over to my left. Joan.

Ms. JANICE PERLMAN: Janice Perlman. I wonder if there wasn’t any—why there wasn’t any mention in either of your talks about the role of the third sector, the space between the market and the state. And I know, George, in a lot of your writing, you talk about civil society and social capital. Wouldn’t that be a factor in determining a different model of, let’s say, entering the global economy with more participation from local people in Third World countries using capital and making their own decisions and setting their own standards, and yet still being productive? And wouldn’t there be a way to get more access to both information, education, environmental protection, etc., if you included the richness and talent and diversity of this informal economy in the third sector and the various types of community organizations, grass-roots groups and non-profits?

Dr. GELB: Thank you very much. Gentlemen.

Mr. KRUGMAN: I don’t think I have much to say except, by all means, NGOs do a lot of very good things out there in the world. We should not forget that the engine of growth has been greed, but if that can be mitigated, if that can be channeled in a better direction by the presence of NGOs, by all means.

Mr. SOROS: I think we all agree on this.

Dr. GELB: Joan, did you have a question, please?

Ms. JOAN SPERO: Joan Spero. I think our two speakers tonight really agree. They agree that globalization, by and large, is good and that it is also imperfect, and if I heard correctly, the two imperfections were inequity and instability. And I want to ask them what they would do about it. I would like to know, if you were making policy recommendations to the president of the United States for international policy, what would you suggest as a way to improve the system and to address the issues of instability and inequity?

Dr. GELB: George.

Mr. SOROS: Well, I think I should go first, probably...

Mr. KRUGMAN: Yeah.

Mr. SOROS: ...since I’m advocating those things. I think that you need more international cooperation, both to prevent financial instability, and I think that in actual fact there is reasonably good cooperation between the G-7 or the major powers, in practice, but—for instance, in the case of the Mexican crisis, we did, in the end, manage to stabilize the situation through intervention, but they had a lot of trouble with Congress, because Congress has this view about markets and non-intervention by the state which makes things much harder. So I think this is a very dangerous, unstable situation, because the need for intervention and manage—some degree of management is not recognized.

When it comes to inequality, again, you need—I think you would need strengthening of international institutions is not in the spirit of the present time.

Dr. GELB: Paul.

Mr. KRUGMAN: I think we have a real difference here. I’m generally suspicious of calls for international cooperation, mostly on the ground that it’s—it’s often—more often than not, spectacularly ineffectual, and it’s almost a—it’s—saying that something requires international cooperation seems to me to be almost a recipe for saying that we’re going to talk about it for the next 15 years and not do anything.

On instability, it is true that we—actually twice, first in the early ‘80s and then again two years ago, there has been spectacular international cooperation to deal with countries with problem debts—not entirely clear that was all to the good in either case. For what it’s worth, I don’t think the opposition to Congress had very much to do with a visceral opposition to interfering in the market. It had a great deal to do with a visceral opposition to giving money to foreigners, particularly if you could blame it on the administration, and I’m not sure that that was a very generic thing.

Most of the cure for instability, I think, has to—first of all, there is no permanent cure for—total cure for instability. It’s one of the prices. Some instability is the price you pay for a market system. Most of the things you can do rest in the hands of countries themselves. If you want to ask, is there a case for countries to limit the inflows of hot money so as to limit their vulnerability to such sorts of crises, yes, there is, and it’s practiced by such socialist-leaning countries as Chile, which does, in fact, have capital inflow controls.

So if you want to say: Are there things that one might do to reduce somewhat the risks of instability? Yes. I don’t think there’s—they’re a total answer, but they can be done.

On inequality, that’s easy for the US, because we do so little for our poor that the answer is simply do more almost any way you can, and we, again, have such a low tax burden compared with other advanced countries that it—that is, in principle, not a problem. Of course, politically, it’s not on, but that’s, I guess, not what we’re talking about.

Mr. SOROS: But that is what we are talking about.

Dr. GELB: Alex.

ALEX: My question’s already been asked.

Dr. GELB: Oh, OK. John Sewell, over here on my left.

Mr. JOHN SEWELL: I’d like to push this a little bit further because I think—I don’t differ with Paul Krugman very often, but I think the record of international cooperation, outside of macroeconomics, in the last 40 years, has been very good. You can look at disease, you can look at all...

Mr. KRUGMAN: Oh, yes.

Mr. SEWELL: ...the things you cited in human improvement. They’ve come about, to some degree, by international cooperation.

Mr. KRUGMAN: No, no.

Mr. SEWELL: That’s not my question. I thought the answer on international cooperation was very weak, because there’s no way to deal with globalization without forms of international cooperation. If it’s not on we’re in deep trouble. So therefore, the question is what do you do in the interim if vast global restructuring of international governance is not politically possible? And particularly for Mr. Soros, your concept of an open society is very interesting, but, of course, there is a nascent open society transnationally, that what is going on now, as caught in the last Foreign Affairs article by Jessica Matthews, is the creation of an international civil society that’s—meets and talks under Council on Foreign Relations’ auspices and everybody else’s auspices, and it seems to me that is where movement is going to be made in the short term.

Dr. GELB: Question, John?

Mr. SEWELL: No, I’m just looking for reactions.

Dr. GELB: OK. Reactions? George.

Mr. SOROS: Well, no, I don’t have any particular reaction. I don’t—I wish I had sort of a program that I could propose to you. I’m really trying to make a point that we ought to recognize, you know, the precarious nature of the global economy, should not take it for granted, and look for ways to reduce instability and inequality. I can’t go any further. You know, I haven’t sort of been devoting my time to finding any answers.

Dr. GELB: Thank you. On my left, Winston.

Mr. WINSTON LORD: Winston Lord. I’d like to ask both speakers: Will the forces of globalization inevitably bring more open, yes, even more democratic societies in China, in Vietnam, in Burma, in North Korea? And if so, how soon? And if so, George, isn’t that another plus factor for globalization?

Mr. SOROS: I would say the answer is no. There is nothing automatic about the transition from economic prosperity to democracy. Yes, Korea has made a step and now is in economic trouble. In Singapore, you’ve got...

Dr. GELB: George, the microphone, please.

Mr. SOROS: Yeah. In Singapore you’ve got a really very successful ruler who’s telling you that’s not the way to go, and in Burma you’ve got a regime that is absolutely determined not to allow any democracy. So there is no direct relationship. That is one of the problems, and that is, actually, the point I’m trying to make, that we ought to have some other standards than free trade at—to guide us in international relations.

Dr. GELB: Would you like to comment, Paul?

Mr. KRUGMAN: Yeah, I mean, I don’t think I disagree with that last statement. Let me just say I’m also—I’m not one of these—I don’t think history is anywhere close to being over, and for what it’s worth, let’s even do the numbers. It is true that there’s a correlation between per-capita GDP and democratization. So on balance, global growth is good for democracy. But if you—even if you take those results, think about the fact that if you believe that China’s going to be the world’s largest economy by the year 2020, at that point, at the point at which it overtakes the United States in sheer size, it will do so at a per-capita income about the same of that of Syria today. So that doesn’t encourage a tremendously optimistic view of the world.

Dr. GELB: Hard, very important subject—globalization of the world economy. Good questions, very thoughtful presentations. Join me in thanking our speakers.

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