International Herald Tribune Paris, Thursday, December 17, 1998
A Proposal of Economic Reform for Our Generation
By Gordon Brown
CAMBRIDGE, Massachusetts - Mr. Brown is chancellor of the Exchequer of Britain.
More than half a century ago, leaders who were still engaged in war took the time to prepare for peace. They created not only new international institutions and new rules for the international economy, but they gave expression to a new public purpose based on high ideals. A generation who had known the Depression of the 1930s and the desperation of war, they knew that just as peace could not be preserved in isolation, so prosperity could not be maximized in isolation.
The initiatives and institutions of the Bretton Woods era were shaped to the conditions of the time. The international rules of the game then largely consisted of open current accounts, fixed exchange rates and closed capital accounts and of collective support when countries ran into balance of payments problems. And for nearly 30 years the system worked. But over the next generation eventually the sheer force of international financial flows successively ended dollar convertibility into gold, the fixed exchange rate system, and post-war Keynesian certainties.
The 1980s saw a new consensus emerge, essentially an attempt to return to laissez-faire. It said that all government was bad: that government can't make a difference, at least a positive one, in jobs and growth, and that global markets have to be left entirely to market dogmas.
By 1997, an increasingly turbulent and inadequately supervised international financial system threatened to create boom and bust on a global scale. The postwar hope for an indivisible prosperity was replaced by the sudden fear of indivisible instability.
In recent months, as interest rates have come down, and the G7 group of leading industrialized nations have set a timetable for reform, financial markets have become less unstable. But this is no time for complacency.
I believe the Third Way initiated by Tony Blair has profound relevance for the challenge we now confront on the global stage. The issue is not one of either markets or government, but how markets and government can best work together.
We must rediscover the public purpose and high ideals of 1945 with four major reforms that add up to a new economic constitution for the new global economy.
First, we need new rules of the game for the global economy. All countries, rich and poor, should agree to apply new codes of conduct for transparency and disclosure as a condition for participation in the international financial system. These internationally agreed codes of conduct would cover monetary, financial and fiscal policy and corporate governance. The codes will require accurate reporting to the international community, by each national economy, of all relevant information. And they will involve both the private and the public sector.
Secondly, because today's financial markets are global, we need not only proper national supervision but also global financial regulation. That is why Britain has proposed bringing together the IMF, the World Bank and key regulatory authorities in a new permanent Standing Committee for Global Financial Regulation, not an additional institution, but a process of monitoring developments in global finance.
Third, we need a modern framework for crisis prevention and resolution. Our aim must be to identify potential problems at an early stage where preventative action can be effective. This framework must be rooted in greater transparency, reliable surveillance, and networks for cooperation between the public and private sectors in which both accept their responsibilities.
Fourth, we propose a code of global best practice in social policy that will be applicable to every country. It will set minimum standards, and will ensure that when the IMF and World Bank help a country in trouble the agreed program of reform preserves investment in the social, education and employment programs that are essential for growth.
This is more than simply a collection of proposals. It rests on a modern vision of government, doing the right thing, but not everything; of markets working, but not always perfectly; of principles of economic and social justice that reflect our best values and ultimately determine world stability and growth. This is a program of reform for our generation.
This article was adapted from a speech delivered at Harvard University.