The International Economy and U.S. Foreign RelationsReuben Jeffery III, Under Secretary for Economic, Energy and Agricultural Affairs
Remarks to the Washington International Affairs Association
November 24, 2008
As Prepared for Delivery
Thank you, Ambassador Lamb, for organizing today’s luncheon. I appreciate the opportunity to address such a distinguished audience of retired members of the military, diplomatic corps, and press. This afternoon I thought I would briefly review the outcome of the November 15 Summit on Financial Markets and the World Economy and then turn to several ongoing international economic challenges with which the new Administration must grapple.
We meet today at a particularly momentous time – one of economic crisis and economic uncertainty, both in the U.S. and around the globe; and one of political transition. Yet, it is also a time of great hope and opportunity.
Readout of November 15 Financial Summit
One significant outcome of the November 15 summit is simply the fact that it occurred. It was the first time that leaders of developed and emerging market economies came together, as partners, in response to a shared global challenge. Such cooperation is and will continue to be essential; no longer can developed economies alone resolve economic challenges, financial or otherwise. The U.S. showed leadership in convening the summit, and the U.S. will continue to work with the G-20 and other countries and international financial institutions to develop effective responses to the crisis.
It was a highly productive meeting. G-20 leaders and finance ministers discussed the causes of the crisis, discussed national and coordinated measures taken to date to address it, and agreed on measures to help prevent such crises in the future. The leaders agreed that the causes of the current turmoil have their origins in “inconsistent and insufficiently coordinated macroeconomic policies,” financial market vulnerabilities, and deficiencies in regulatory regimes and international institutions.This situation has taken a long time to develop and will therefore take time to cure.
One important achievement of the summit is the broad consensus on the need for growth-oriented policies. The G-20 countries have taken steps individually to stimulate their economies, provide liquidity, strengthen the capital of financial institutions, protect savings and deposits, and unfreeze credit markets. There is no one-size-fits-all approach. Each country has to determine for itself how best to stimulate domestic economic activity in the immediate term. Leaders also agreed on necessary measures to strengthen the global economy in the long term.
The G-20 leaders adopted a set of reform principles linking national financial market regulations, international institutions, and the global economy. And they laid out an action plan: 47 individual action points, in fact, to carry out these recommendations. The plan calls on national-level financial authorities to strengthen market transparency and regulatory regimes, ensure all sectors of financial industries are subject to appropriate oversight, and ensure the integrity of financial markets.
The leaders set forth some very specific work to be done. For example, by March 31, 2009, regulators and accounting standard setters should have required enhanced disclosure of complex instruments by firms to market participants. The G-20 leaders called on supervisors and regulators, building on the work that has already been done (particularly in the U.S.), to put in place efforts to reduce the systemic risk associated with credit default swaps and over-the-counter derivatives, insist on exchange-traded or electronic trading platforms, and ensure that the necessary trading, clearing, and reporting infrastructure is in place. Leaders also called for registration requirements for credit rating agencies, as has already been done in the U.S. Perhaps fortunately, leaders did not get into the technical aspects of accounting methodologies, the workings of the CDS market or executive compensation schemes. They did, however, leave very specific work instructions for the relevant technical experts and working groups.
Moving forward, the response to the crisis will continue to require close coordination among policymakers in different jurisdictions. This is one reason why leaders agreed to ensure that the major international financial institutions adapt their governance, representation and responsibilities to a global economy that is far more integrated, and the participants far more diverse, than was the case when these institutions were established sixty years ago. The leaders also agreed on the need for bank supervisors from various countries to establish supervisory colleges for all major cross-border financial institutions, institutions that ultimately may have systemic implications for the global financial system.
Leaders called for the Financial Stability Forum – which brings together senior representatives of certain central banks, supervisory authorities and finance ministries, international financial institutions, and international regulatory and supervisory groupings – to expand its membership. Voting weight within the International Monetary Fund must be adjusted to better reflect the weight in the world economy of dynamic, fast-growing emerging economies.
Leaders also called on the IMF, FSF, and regulators to develop recommendations to mitigate systemic risk, including a review of how valuation and leverage, bank capital, executive compensation and provisioning may exacerbate cyclical trends. Finally, the G-20 called upon the IMF, with its focus on surveillance, and the FSF, with its focus on standard setting, to strengthen collaboration and enhance efforts to better integrate regulatory and supervisory responses into the macro-prudential policy framework and conduct early warning exercises.
In summary, an unprecedented collective response to a financial market and economic crisis of historic proportions.
Upcoming Challenges for the Global Economy
Turning from the specifics of the G-20 summit for a moment, let me highlight several ongoing challenges. As we continue to respond to global economic turmoil, G-20 leaders recognized that they must take renewed action to assure free and open international trade and investment and reaffirm their development assistance commitments.
1. Maintaining Open Markets:
President Bush urged other leaders not to turn inward in times of economic uncertainty. So the U.S. and other countries need to renew efforts to promote open trade and investment, and to resist short sighted calls for protectionist measures. On November 15, the G-20 leaders explicitly committed not to impose or raise new barriers to trade and investment during a 12-month period and committed to redouble efforts to achieve a successful Doha round.
2. International Development
The U.S. is the world’s largest donor of official bilateral foreign assistance and private assistance, as well as the largest contributor to multilateral development institutions. U.S. Official Development Assistance has more than doubled since 2000 from $10 billion to $22 billion most recently. U.S. assistance to Africa has quadrupled.
What have the U.S. and, more importantly, the recipient countries, done with this assistance? The United States has used it to fight diseases that needlessly shorten lives but that, with the right resources, can be cured, prevented, or managed. Since 2003, U.S. taxpayers have invested $48 billion to the fight against HIV/AIDS, TB, and malaria; $39 billion was dedicated to bilateral programs through the President’s Emergency Plan for AIDS Relief (PEPFAR), and contributions to the Global Fund to fight HIV/AIDS, TB, and malaria. In 2003, only 50,000 HIV/AIDS patients in sub-Saharan Africa were receiving anti-retroviral treatment. Today, PEPFAR supports treatment for nearly 1.7 million people worldwide. And because of PEPFAR, nearly 200,000 African children born to HIV-positive mothers have been born HIV-free.
U.S. assistance programs have fought malaria, a disease that can be prevented with technology as simple as a mosquito bed-net, but nevertheless infects over 500 million people and claims between 1-3 million lives per year worldwide. $1.2 billion has been committed to the President’s Malaria Initiative, which has reached 25 million people through bilateral initiatives. And the U.S. committed $4 billion to programs to fight tuberculosis, the leading killer of Africans living with HIV.
All these efforts are making a difference. According to a recent United Nations Children’s Fund (UNICEF) report, global child deaths reached a record low in 2006, falling from 13 million in 1990 to 9.7 million last year, the lowest level since recordkeeping began in 1960. Of course, the U.S. is only one of many donors who contributed to this result, but our substantial investment in health programs was undoubtedly a contributing factor.
Aid is vital, but money alone is not sufficient to ensure economic development. One of the groundbreaking achievements of the past 8 years was the successful brokering of the Monterrey Consensus in 2002. That UN Conference emphasized country ownership and the need to mobilize all sources of financing for development. In other words, developing countries themselves have to adopt policies that permit and promote growth; foreign aid will be effective when it supports and complements pro-growth policies of the recipient countries.
In line with the approach outlined at Monterrey, and working closely with Congress, the President established the Millennium Challenge Corporation: a means of providing foreign assistance that emphasizes good governance and country-led programs to combat poverty and to improve health and education. MCC measures its success not by the amount of funding it provides, but by the results it achieves on the ground. And in a time of scarce financial resources, it is all the more important that development assistance be evaluated on this basis.
Despite the global slowdown, the U.S. remains steadfastly committed to development assistance pledges and expects other donor countries to do the same. As the President emphasized at the October 21 White House Development Summit, difficult economic times are not an excuse to walk away from promises made to those most in need. The United States has accomplished a lot in the past 8 years, but much work remains to be done.
Importantly, official development assistance is not the only source of financing for development. For example, a recent Hudson Institute study states that American private international development-oriented philanthropy to poor countries totaled $35 billion in 2006, much higher than the $23.5 billion in U.S. official foreign aid that same year. The generosity of the American people is without peer.
It was just 4 years ago when hundreds of thousands of people perished in Indonesia and several other countries in the aftermath of the tsunami. The U.S. Government provided $840 million in assistance, while private American assistance totaled $1.8 billion. A recent major flow of private foreign assistance occurred after the May earthquake in Sichuan Province of China, when donations from private American sources totaled $90 million, compared to $3 million in government aid. Similarly, following the Burma cyclone, even though the country’s rulers discouraged and blocked outside help for almost 3 weeks, private American assistance totaled $30 million, exceeding official U.S. aid of $24 million.
Much has been accomplished over the past several years, but much more remains to be done. Let's not forget that there are some 1.4 billion people – roughly a quarter of the population of the developing world – who survive on less than $1.25 a day, the World Bank’s most recent estimate of the global poverty line. Fortunately, the desire to help those most in need to help themselves is in Americans’ DNA. In difficult economic times, we cannot turn away from these commitments. There is no better investment in our long term well-being.
3. Need to Work with Brazil, Russia, India, and China.
Working with these countries is not without its challenges. For example, giving these countries a greater voice in multilateral fora will require a reduced representation for certain other countries. In addition, we must strike the right balance between addressing economic challenges while at the same time not diminishing our resolve on fundamental issues on which we may disagree, such as human rights, democracy and environmental protection. Of course, it may be more difficult to reach consensus with the BRICs, the G-20 or any larger grouping of countries on issues of shared concern. But the U.S. needs to work broadly and more systematically to achieve meaningful outcomes in addressing shared challenges.
A final observation. The global crisis seems to have intensified discussion of the future role of the U.S. as a world power. Some analysts say the crisis will contribute to a decline in U.S. power and influence. A recent National Intelligence Council report made news by asserting the likelihood of reduced U.S. influence in a more multipolar world. True, but the NIC report continues to posit that even in 2025, despite an extended period of strong economic growth on the part of the BRICs and other rapidly developing countries, the U.S. is likely to remain the single most powerful country, albeit in a more multipolar context.
The increase in relative economic power of emerging market countries presents as many opportunities as risks. Economic growth is not a zero sum game. We benefit when emerging markets grow their economies. Therefore, we must engage the world and emerging economies as best we can, to shape the future in as constructive a direction as possible. The President’s convening of the Summit on Financial Markets and the World Economy was a step in that direction and one we can build on.
Through emphasizing international development, advancing international trade, and promoting the enhanced voice and participation of emerging market countries in international financial institutions, the U.S. has helped advance and engage more of the world. Today’s economic challenges and those of the future are, in many senses, unprecedented in scope and magnitude. But we are in a strong position to address them because of the high level of integration of the global economy and our demonstrated commitment to working together. And in these efforts we cannot relent.
Thank you for your very kind invitation to speak.