OUTSIDE RULES TO DRIVE UP INTERNAL REFORMS

In a 10-day period, I attended a meeting of the United Nation’s high level panel on the legal empowerment of the poor, visited the Baltic States to speak at a European Union Ministerial meeting on technology and government, then zipped into Zurich to talk with investors about changes in Asia/Pacific and trade. Thinking on these long flights of what successful emerging economies have in common, I’ve learnt that where there’s an economic problem of non-performance, seek more competition. Where there’s a political problem, seek out more democratic results. (Development and growth are about adopting best standards and practices.) The UN Commission’s work is about how we can promote and lock in property rights and ownership so that the poor can realise on their assets. This only works if the legal system is trusted and courts independent. The Baltic States have shrugged off their Soviet past, they quickly joined the World Trade Organisation and then the European Union and NATO, establishing the economic foundations for progress, the political anchor as a member of the EU, and the security and confidence NATO membership implies. There now can be no going back. Estonia had no modern technology when it became free and independent in 1991. Government offices and most companies were poorly served by old mainframe computers and the Ministry of Foreign Affairs had only two mobile phones. It was illegal for private individuals to have computers. Now Estonia is in the top 20 countries for internet penetration. All schools are connected, half the population has web access, 80% of bank transfers are made over the internet. Since independence, per capita income has increased from $600 in 1991 to $6,000 in 2004. Latvia has a programme to wire pre-school centres, and Lithuania now boasts the highest mobile phone penetration in the world. They have 4.3 million subscribers to a population of 3.5 million people.

True patriots and real reformers who are serious about progress sometimes need outside pegs to drive up internal reform. The very smart leaders use membership of international organisations and their rules and standards to benchmark their reforms. Taiwan had no problem joining the World Trade Organisation. They had for years acted as though they were members insisting their companies and Ministries comply with the agreed rules and mandates of the WTO. Looming membership of the WTO is making countries like Vietnam more transparent, open, as they adopt global standards to join. Turkey has had to change hundreds of laws, advance human and labour rights, adopt new environmental standards as it battles to join the European Union, as do other East and Central European countries. Some nations, hopeful to join the EU, have adopted before membership the Euro as their currency. In the 1980’s, the New Zealand Labour Government ‘floated’ the dollar and enshrined independence for our Reserve Bank. Investors had for a generation expected New Zealand governments to manipulate currency and inflation for electoral purposes. It worked. It’s hard for politicians to surrender these levers. The greatest outside force that can punish or reward economies whose leaders ‘blink’ to election-year pressures is international investors, share prices, interest rates, and currency volatility. The market can be a tyrant, it will move swiftly when a government goes into deficit or makes foolish expenditure promises. All this means good governance, transparency, and sound management are at a premium. Good businesses have known this for years, that’s why the best employ outside auditors, seek international standards and are open in their reporting to the markets.

International institutions like the World Trade Organisation through its agreements, the OECD through its public reporting procedures, and the Central Banks, have played a vital restraining role when crises, such as the Asian downturn in the 1990’s, to help stop governments following failed policies, or priming the pump, dash for growth, all those 1970’s and 1980’s failed initiatives. We didn’t have Central Banks, the WTO, the IMF, or World Bank at the time of the Great Depression. They are all creatures born from that experience and in the main have worked. Nations still can commit suicide and many still do. Mugabe in Zimbabwe has followed Stalin’s and Mao’s agriculture policies with the State telling people what and where to plant with predictable results. The important word is "predictable". Markets hate surprises.

Some suggest this is the end of sovereignty, I argue the opposite. Global rules negotiated by governments guarantee the rights of nations. And if globalisation means governments don’t matter, how is it that Chile’s done better than the Argentine, Botswana better than Zimbabwe, and explain the difference between North and South Korea, Burma and Thailand. Note the successful countries live and manage by transparent, international standards and are rewarded accordingly.