EM 20 years profile: Lawrence Summers
Dealing with the fallout of emerging market crises characterized much of Lawrence Summers’ time in government. His advice to many countries at the time – including building up foreign exchange reserves as a buffer against future shock – has had lasting effects
From his arrival at the World Bank as chief economist in 1991 to his departure as US Treasury secretary a decade later, Lawrence Summers repeatedly played a central role coordinating the official response to the recurring crises that gripped emerging markets over the period. His short, sharp, well-timed telephone calls across the world imbued US international economic policy with the sense of urgency that was needed in an increasingly fast-moving global financial system. And just occasionally, they ruffled a few feathers.
I tried very hard during my time in government to put much more focus on emerging markets, to assure that there were much more aggressive responses to financial difficulties of emerging markets, to make sure that there was much more inclusion of emerging market countries in international financial dialogue, Summers tells Emerging Markets.
He worked to design a new set of tools, especially for the IMF, including more effective surveillance of financial vulnerabilities, greater transparency in the international financial system, the introduction of new lending facilities to deal with capital account crises and improvements in multilateral lending practices.
James Wolfensohn, whose tenure as president of the World Bank coincided with Summers time at the Treasury, recalls the combination of sheer determination and a keen grasp of financial realities that helped craft effective action. In the Asia crisis or Latin America crisis, Larry would call me up and say: The Bank has to put in $6 billion, and I would tell him to go to hell, and hed say: Its got to be done by tomorrow morning. And wed eventually put a package together and wed announce that wed be putting in $6 billion, but wed never put in a penny, he tells Emerging Markets.
The point was it was a restoration of confidence, he adds.
That confidence boost was particularly significant, given that the US found itself facing unprecedented challenges as volatile capital flows went global. According to Charles Dallara, himself a former Treasury official and now managing director of the Washington-based Institute of International Finance, the Mexican financial crisis of 1994-95 was the first crisis of the capital market period. US proposals for a bail-out met with criticism from Europe, but Dallara believes history proved that Summers strong and courageous action was right. It was a crucial moment in the evolution of emerging markets in the 1990s.
Again in the Asia crisis of 1997-98, says Dallara, Summers expounded to his international counterparts the importance of a coordinated global response. But Asian views of him were more ambivalent, because he was cool to their own plans to combat the malaise the concept of a single Asian monetary fund. The plan, advanced during the IMF/World Bank annual meeting in Hong Kong that year, would have pooled Asian reserves to offer speedy and adequate assistance to crisis countries, as opposed to what was seen as condition-laden and slow aid from the IMF.
Summers personally flew to Manila when the plan was advanced and helped to structure an alternative and more loosely-structured regional cooperation effort known as the Manila Framework, which has since become virtually defunct. Shijuro Ogata, a former Japanese central banker, tells Emerging Markets that this may have produced a negative reaction to the Japanese proposal for an Asian Monetary Fund. But he acknowledges that China might not have supported the proposal in any case.
Build up the reserves
Summers remains critical of the idea of Asian monetary cooperation to this day, telling Emerging Markets when the plan was discussed again in May 2007: The risk of the sort of crisis that befell Thailand, Korea or, to a lesser extent, Indonesia has been hugely attenuated by events, principally by the tremendous accumulation of reserves. Indeed, during the Asian crisis, Summers and others counselled the building up of reserves to reduce the risk of subsequent crises.
Moreover, says Rei Masunaga, a former Bank of Japan official, today the private market plays the role of channelling necessary funds to emerging markets in Asia, mainly by way of direct investment. Wolfensohn believes Summers always had the confidence to take the long view, and assume that the private sector would ultimately drive emerging market development, provided the official sector handled the emergency stabilization efforts. Larry himself had been an economist at the World Bank, he understood that real changes were taking place on the ground in these countries, he says.
Summers belief in the power of free trade and the market to engineer real progress made him the governments leading advocate of allowing Chinas WTO entry during his time at the head of the Treasury from 1999-2001. He pushed this policy through in the teeth of politically motivated opposition in the US. I am very encouraged by where emerging markets as a group are today and I think that has something to do with the financial policies, I think it has something to do with the trade policies that we worked hard to promote, Summers insists.
While his tools were financial and his manner uninhibited by diplomatic niceties, he emphasizes that he never forgot the human element of promoting prosperity in emerging markets. I tried to use techniques of finance to serve objectives that transcended finance, like improving the quality of health and education policy, he says.
This profile is one in a series of twenty, published in a special commemorative edition to mark the 20th birthday of Emerging Markets newspaper. The profiles canvass twenty of the figures who have had the most impact on the rise of the emerging markets over the past two decades.