Increasing economic growth and stability in emerging markets.

• Author: Taylor, John B.

Ownership, Growth, and Stability

The Bush administration's emerging market strategy is an interrelated part of our overall international economic agenda. The agenda focuses on two goals: increasing economic growth and increasing economic stability throughout the world, not only in emerging markets countries, but also in the developing countries and in the industrial countries, including the United States. President Bush's idea is that each country, by following proven economic policy principles and considering its own circumstances, can contribute significantly to greater global growth and stability. His stress is on country ownership of policies, with the United States willing to provide strong support for good policy reforms.

These economic goals have not changed since the start of the administration. Indeed, the challenges of the war on terrorism--especially the need for increased resources for security and for the removal of hotbeds of terrorism--make economic growth and stability more important than ever.

Consistent with these goals was the administration's perseverance in winning back presidential trade negotiation authority: free trade is a key driver of both economic growth and stability. The goals also underlie our economic policy program for the United States where fiscal and monetary policies to combat the recession were implemented in a remarkably timely fashion.

A theme of our pro-growth policy has been productivity growth through job creation in the private sector. Higher productivity is essential for increasing living standards and reducing poverty. The keys to raising productivity growth are the rule of law, sound fiscal policy, low-inflation monetary policy, and the reduction in barriers to trade--both external and internal.

Let me now focus on the part of our international economic agenda dealing with financial crises and other instabilities in emerging markets. I will begin by discussing the problems we are trying to solve with this strategy.

Three Related Problems

First, in recent years there has been a marked increase in the frequency and severity of financial crises in emerging markets. A recent McKinsey study, "Dangerous Markets: Managing Financial Crises," puts the 1990s increase at 60 percent compared with the 1980s, and showed that more countries have experienced crises in recent years. But even if there were no increase in the number of crises in recent years, the number would still be too high. The damage caused by economic and financial crises--deep recessions, rising unemployment, volatile exchange rates, sky-high interest rates--create real hardships for people. And the uncertainty caused by economic instability reduces foreign and domestic investment and has negative implications for long-term growth.

Second, there has been a sharp decline in net private capital flows to emerging markets in recent years. Averaging more than $150 billion per year from 1992-97, net private capital flows fell off to less than $50 billion per year in 1998-2000. Guillermo Calvo of the Inter-American Development Bank calls this sharp drop-off a "sudden stop." There are many explanations for this sudden stop, but the increased frequency of financial crises, which has increased volatility and damaged expected profitability, is one reason. Restoring private investment flows into emerging market countries would help create higher productivity jobs and raise living standards.

Third, real interest rates are still very high in many emerging market countries. These high interest rates--caused in part by the risks of financial crisis and the policies that raise such risks--discourage investment in productivity-raising capital. As Secretary O'Neill emphasized, the high interest rates are a burden on the people in the emerging market countries; they are the ones who have to pay the taxes that go to make the high interest payments. If there were fewer crises and more countries followed the policies that merited investment grade ratings, then these interest rates would be lower.

More than anything else our emerging market...