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Allocutions: Mike Moore

What must be the starting-point of any discussion of the financial sector today is the current crisis – a crisis that began with difficulties in Asia but has now become a global economic and financial crisis from which no country and no sector is entirely spared. This afternoon I want to talk about the critical role of the multilateral trading system – and especially the recent Financial Services Agreement – not only in preventing this crisis from worsening, but in returning the world economy to the path of growth.

The financial sector in many ways exemplifies the powerful – but also uncertain – forces that are shaping our globalizing world. In recent years, governments the world over have moved to open up and deregulate many aspects of their financial sectors. At the same time, technological advances in telecommunications and informatics have radically changed the way financial services are delivered across borders - breaking down national barriers, and shrinking distances and time. These forces have combined to transform the financial sector from a predominantly local to a global industry - all in less than two decades.

Your rapid transformation into a global industry is important on another level. When we talk about global trade in financial services we are no longer just talking about products moving across borders. We are talking about building one of the essential infrastructures of the world economy. In developing and developed countries alike, we are becoming more and more aware that basic services industries – especially the financial sector, telecommunications and transport – are now indispensable foundations for our modern economies. Their development will largely determine whether we are equipped to participate in the new global economy - or are left behind.

Yet, as the current financial crisis has demonstrated, this global transformation – both in your sector and more widely – is incomplete. In many cases, we still lack the necessary institutional, regulatory, and legal structures needed to support a fast-changing modern economy - both globally and nationally. Integration and openness vary widely - not only across economies, but across different sectors within your industry and others. In a certain sense, we find ourselves between two worlds - between an economic system that is increasingly global, and institutions and structures which have not caught up with this complex world. The central challenge we face is to bring these worlds together - by reshaping the global infrastructure, rules, and institutions needed to support our globalizing economy.

II

One could ask why, in December last year, during one of the most serious financial crises of the past fifty years, 102 Member Governments made binding commitments to liberalize their financial services trade under the Financial Services Agreement of the WTO – an agreement which is to be ratified by the Members concerned by the end of January 1999. No country threatened to withdraw from the negotiations because of the crisis. And none withdrew the offers which had already been tabled. Even the Asian countries most seriously shaken by the crisis made commitments to improve access to their markets for foreign financial institutions. They did so in the belief that stronger competition and greater openness will make their national infrastructures stronger, not weaker.

They are absolutely right. The reason why liberalization under the Services Agreement will be so important is that the Agreement is really about providing the tools to build a stronger financial system for all economies – developing and developed alike. It will do this by introducing greater competition and choice in the financial service market; by enlarging the presence of foreign banks, insurance companies and securities firms; and by building this new, stronger, and more open financial infrastructure on a firm foundation of agreed multilateral rules. The value of binding these policies in a multilateral treaty is that it will give a clear assurance that these policies will not be suddenly and arbitrarily overturned; which will in turn help countries to attract the investment they need – particularly in this uncertain global environment.

How will financial services liberalization strengthen the financial infrastructure of economies? The first thing to emphasise is that financial services liberalization is not equal to capital market liberalization. The Agreement will only require WTO Members to allow in-flowing capital for the supply of a given service – whether a bank, insurance company or securities firm. This is an important distinction to make because there is a worrying connection – in the minds of some – between the current crisis and the liberalization of financial services. Second, we are talking about services liberalization inside a system of rules and procedures which have been agreed by consensus – with the necessary flexibility and safeguard clauses that are an essential part of the Agreement. We are not promoting what some call "wild liberalization" - a market free-for-all. Third, through liberalization, we will create the necessary incentives to promote the needed prudential and regulatory policies – in the most sophisticated markets, as well as in the emerging markets. These incentives are the best guarantee of a well functioning market economy because they are about improving the overall competitive environment. Financial services liberalization is not the problem in this financial crisis – it is an important part of the solution.

There are a number of reasons for this. For one thing, the new commitments to liberalization will favour long-term investment in the development of capital markets. And this, in turn, will help to strengthen the financial infrastructures of all economies – particularly in the developing world. Technology and knowledge also go hand-in-hand with investment. This includes knowledge on best practices in management, accounting, data processing and in the use of new financial instruments – all of which will flow from the commercial presence of foreign banks and insurance companies.

At the same time, greater competition means that financial institutions – both foreign and domestic – will be encouraged to be more attentive to consumers, to be more transparent, and to better allocate investment resources. Far from destabilizing financial markets, an open financial services sector will actually enhance stability and confidence by making the system more accountable – because openness means that institutions have to answer to investors and to adhere to international rules.

It is not just the financial sector which can be strengthened by liberalization. There are reasons to believe that liberalization of financial services trade will help promote better macroeconomic, monetary, fiscal and exchange rate policies. For one thing, the efficiency of monetary policy is likely to improve. Credit and interest rate ceilings often serve as monetary policy instruments to control credit expansion and inflation in a closed financial system. Liberalization, on the other hand, requires the replacement of such controls by indirect policy instruments, such as open market operations, to control liquidity

None of the commitments made in the Financial Services Agreement will limit a government's ability to pursue sound macroeconomic and regulatory policies. In fact, as argued above, it will enhance their options and increase their flexibility. Members will be free to take any necessary macroeconomic policy decisions. And it will allow temporary, non-discriminatory restrictions on trade in services, including those on payments and transfers in the event of serious balance-of-payments and external financial difficulties.

III

The fundamental point is that freer multilateral trade does not mean freedom from rules. On the contrary. The goal of the WTO is the establishment of a universal system of non-discriminatory and consensus-based rules - rules which help goods and services move across borders, but which also provide greater stability, security and predictability in our fast-changing world economy.

The Financial Services Agreement is an extremely important step forward – particularly in the present crisis. But there is much more that the trade system can – and must – do. First, we need to be clear that a return to protectionism in the present circumstances would be a tragic mistake. No country can now expect to export its own products freely – and continue to import capital and technology – if it erects barriers to trade with the rest of the world. It was turning inwards which transformed the financial crisis of 1929 into a global depression. We do not need to relearn that lesson.

Secondly, every economy has a part to play. A situation in which some major economic powers are outside the multilateral system of rights and obligations can hardly be stable. We must therefore maintain and intensify the effort to bring China, Russia and other countries now negotiating accession to the WTO inside the system, so that they can play their full part in responding to the crisis. This would be a powerful signal of confidence in the world economy and in our ability to maintain and improve market openness.

Thirdly, we must show that we are firmly resolved to keep moving forward. The WTO is already committed to major new negotiations to further liberalize trade. These will start at the end of 1999 – on the threshold of next millennium. At the Third Ministerial Conference, which will be held late next year in the United States, WTO Members will decide on the complex agenda of these negotiations.

IV

I began by observing that the financial industry today must be prepared, not only to adapt to a changing global environment, but to help shape it. With your long history of universal banking and global outreach, European Banks are ideally placed to play their part. You are employing new technologies and expanding into whole new financial service activities. And you are developing new corporate strategies - through mergers and acquisitions. But you can go further in these directions. And at the same time, you have a growing interest in maintaining the stability and forward momentum of the global trading system – both of which are more critical than ever in these uncertain economic times.

Just as the financial sector must continue to lead, so too must Europe. It was the ambition of the EU's own internal liberalization process which helped inject momentum into the US initiative to liberalize financial services world wide. It was also Europe which helped rescue the financial services negotiations from collapse in 1995, and kept them on track to their successful conclusion last December. Now, as nations and governments grapple with the current financial crisis – and with the task of building a stronger foundation for the financial system - Europe will once again be looked upon to play a leading part. Last year the European Union had a current account surplus of over US$ 120 billion and this year, despite the crisis, the surplus will be almost US$ 100 billion – meaning that Europe clearly has the flexibility and the strength to share a leadership role.

Which brings me to a final point. That the strength of Europe's leadership will depend fundamentally on its economic strength and competitiveness at home. In this respect, I must say that I find it very worrying that, in the ILO's latest forecasts, more than 18 million workers are still without a job in the European Union. And that, according to the ILO, the percentage of unemployed is higher in Europe than in any other region of the world – without taking into account the underemployed. These figures not only reflect a human tragedy and a formidable social and economic cost. They are a clear and unavoidable sign that Europe has much more to do in breaking down barriers to employment, and in empowering its citizens to compete in an idea-based global economy.

V

We hear many critics – in this period of time – of globalization and its role in the present crisis. But globalization is not a policy - to be judged right or wrong. It is a process – driven by the logic of economic and technological change. Moreover it is a process which is redefining the meaning of interdependence – creating a human dimension of globalization which demands an equally global policy response across many levels and many fields. The alternative to this necessary process would be to create again strong national and regional barriers. It would be a tragedy for all mankind.

In reality, addressing the financial crisis is just the tip of the iceberg. What we need is to improve the management of this new, complex and growing interdependence we call globalization. We need a new vision – to encourage greater participation and responsibility on the part of developing countries, as well as to promote a greater understanding on the part of all of us that the problems we face go well beyond sectorial policies only.

Last week, when I was preparing my speech for this meeting, I read on the same day two articles: One by Jeff Garten in the International Herald Tribune, calling for a Global Bank, and a second in the Economist, discussing the idea of a world currency. My mind went back to the 5^th August 1977, when Roy Jenkins, at that time President of the European Commission, met with the members of his cabinet and with me in his country house in Wales, to discuss how to revitalize a European Community shaken by the competitive devaluations that followed in the wake of a floating dollar and the first Oil Crisis. On that day he told us about his vision for the creation of a European Monetary System – what was to be the first step towards a Single European Currency.

He was right in arguing that this was the only logic that could save Europe from financial turmoil – and prevent trade liberalization from unravelling. It was a road forward lit with common objectives, common rules and common disciplines. At that moment, the idea of a single European currency was seen by most as an impossible dream. Twenty years later, this dream is becoming a reality.

I do not want to predict how many years will need to pass before we see a world currency – or if we will ever see one. What I want to tell you is that to emerge from the current crisis we certainly need to support the different efforts of the financial authorities – both national and international – to restore stability and growth. But we will also need vision, we will need courage, we will need to look beyond the next few weeks or month in front of us – as we did twenty years ago. And more than ever, we will need to build something whose impact goes far beyond our national and regional borders.

The great lesson of our generation has been that vision has always defeated scepticism. This has been the case with the fall of the Berlin Wall without a war; or with the European construction – from a devastated and divided continent, to a customs union, then a single market, and now a single currency. Let me say that it will also be the case with our efforts, in the WTO, to build a world trading system, rules based. Thank you.