First of all, I want to say what a genuine pleasure it is for me to be at NYU this afternoon. As a personal matter, this lecture is something of a culmination of my year as Visiting Professor at Stern. It also provides a bit of nostalgia. Some 21 years ago, I took part in the predecessor Moskowitz Memorial Lecture series. That lecture was printed in a little volume entitled, The Rediscovery of the Business Cycle. In the midst of this record breaking economic expansion, the subject may seem less relevant today. But then I wouldn’t be too sure!

What I do know is relevant is my special joy—as the first Henry Kaufman Visiting Professor—in participating in the dedication of The Henry Kaufman Management Education Center. Henry has had an enormous impact on this institution. It could not have reached its strong presence in the world of finance and of management education without his intellectual stimulus as well as his generosity.

Henry not only likes to analyze and think; he puts those thoughts on paper. A persistent theme of his in recent years has been the need to reorganize banking and financial regulation in a way that reflects the globalization of markets. I’d like to approach that subject from a somewhat different angle this afternoon.

Globalization is, of course, the glib catch word of the day. Those five syllables are repeated so often you may be, like me, sick of hearing them. But we can’t escape. The force is pervasive. It affects almost every aspect of our business, public, and cultural lives.

Most of you know the basic story better than I. Today’s technology—the computers and cell phones, the fiber optic networks and the satellites, the Internet that my grandchildren take for granted—have enormously accelerated the speed and drastically cut the cost of communication and data processing. Close to instantaneously, we know what’s happening around the globe. We have the capacity to respond almost as fast. And that’s especially true in the financial and business world that is the focus of the my concern today.

That is a world in which finance theory, statistical analysis, and mathematics have combined with the electronic technology to produce new techniques for bringing lenders and borrowers together, for reallocating risk, and for enhancing leverage.

One important result has been to render political boundaries more and more porous. As a practical matter, it is really impossible to stifle the flow of information. Without rather comprehensive controls, the flow of money will follow. The rate of technological change is, if anything, speeding up. Any thought of successful economic isolationism seems more and more unrealistic.

One of the startling results is that small emerging economies, as never before, have become active participants in international financial markets. They have become convinced that they cannot benefit at all fully from international trade without a high degree of financial openness.

All that is commonplace. What is not so commonplace is our understanding of the economic and political implications. series of international financial crises of the 1980’s, and more particularly the 1990s, affecting Latin America and much of Asia and Eastern Europe, seem to me to pose the issue.

Financial crises—national or international—are not themselves new. They have been a part of open markets and capitalism through history. At bottom, they are rooted in some basic elements of human nature—the drive for wealth, a willingness to take risks in the pursuit of that wealth, susceptibility to moods of contagious optimism and more suddenly to fear and pessimism.

The pattern has been evident in the recent crisis. The emerging nations of Asia have high potential for growth. Labor is plentiful, cheap and disciplined. The propensity to save is high. Access to education—including advanced education is greatly improved. They can rapidly take advantage of modern technology.

A number of those countries have experienced growth rates of 6, 7 or 8 percent for a decade or two, an achievement so far as I know that has had no parallel in human history. The actual and potential rate of return on capital has seemed commensurately high. The growth process was aided by liberalization of markets for goods and services, both internally and externally.

The opening of financial markets lagged. However, the ideological victory of the ideas of democratic capitalism that marked the end of the Cold War brought a change in attitudes. Controls on the flow of capital in one country after another were rapidly eased or dropped. The result in the years of the 1990s has been startling in terms of the flow of funds to the emerging world, running to over $100 billion by 1996 to Asian developing countries alone.

A significant part of that flow has been direct investment by international corporations. The benefits were only partly the financial resources provided. More significant over time, the investment brought management, technology and easier access to developed markets all parts of the process of globalization.

Even more dramatic for most of the emerging countries was the growth of portfolio capital. Sometimes that took the form of purchases of stocks or long term bonds. But it was more largely relatively short-term credits from banks, from various institutional investors, or from more speculative sources—including the now well publicized hedge funds.

Arguably, that inflow of short-term funds had inherent benefits even though it has carried no sense of continuing commitment. It helped maintain strong currencies. Lower interest rates and more competition among lenders reinforced investment activity and enhanced economic growth. The ability to finance increased imports helped keep inflation down. For a time at least, confidence reinforced confidence.

In the end, as is now clear, that pattern of finance could not be sustained. The amounts involved overwhelmed the capacity of small and fragile banking systems to absorb the funds and employ them prudently. Healthy expansion turned into fragile booms, with overbuilding and excess capacity. Rising trade and current account deficits led to questions about the sustainability of currency values. Eventually, something came along to expose the imbalances and to prick the bubble of confidence.

Then the “hot” money flowed out even quicker than it came in. The outflow as often as not was led by citizens of the vulnerable small economies. But the lack of any sense of continuing relationship by the short-term portfolio investors meant that fear of loss ruled the day.

It is not that the foreign investment institutions themselves were typically in life threatening financial jeopardy. The amount of money they had committed to the emerging markets, from their point of view, was marginal, a small fraction of their assets. But the total amount of money controlled by those institutions is enormous, with single institutions controlling funds larger than the GNP or the total assets of the banking systems of the emerging economies. Plainly, withdrawals of funds, marginal from the point of view of the individual lending institutions in the industrial world, can swamp the defenses of emerging economies—even with large official assistance packages from the IMF and elsewhere.

The all-too-typical result has been sharply depreciating currencies and skyrocketing interest rates. In combination, they are devastating to the financial stability of the vulnerable emerging economies. A financial crisis becomes an economic debacle.

Today, while there are scattered signs of modest renewed growth, the economies of the emerging world are deeply depressed. Instead of the pattern of 6 or 7 percent gain from year to year in Asia, activity is off by 5 percent or more. The reversal may be less sharp in Latin America, but prospects are doubtful.

The first reaction—by the large industrialized countries, by the IMF and other official institutions, and by many private economists—has in my judgment been inadequate.

Much emphasis has been placed on improving the financial infrastructure of the emerging nations—more bank capital, better supervision, better disclosure, less cronyism and corruption. No doubt all those things are important over time in supporting economic growth and efficiency. But it is demonstrable that chronic deficiencies in these areas did not prevent rapid growth over the previous decade or two. Nor has state-of-the-art supervision and transparency in the United States or other countries prevented serious banking problems from arising in those areas from time to time.

Installing new banking and supervisory approaches in any event takes time. That is even more true of the far reaching changes in economic structure demanded by the IMF in a number of its financial assistance programs. Failure to meet the conditions within the time frames set out only further undermined confidence.

Nor do I take much hope from the insistent call by some for flexible exchange rate policies. The fact of the matter is that small and open economies vulnerable to sudden shifts in capital flows will be exposed to violent rate volatility, a point amply demonstrated by the recent crises. That volatility is strongly damaging to internal stability.

In fact, freely floating exchange rates are an extreme that few small economies have maintained for long. More common are various techniques for attempting to manage or guide market rates toward a perceived equilibrium. In other cases, the exchange rate has been more or less fixed against a major currency, or a basket of currencies, in an attempt to stabilize expectations and domestic prices. Those approaches, too, have been vulnerable in the face of crises.

So, what then, is the lesson of these recent crises?

Most broadly, what we are seeing is that the forces pushing toward international integration—toward globalization—are speeding up. The momentum is hard to stop, even for small and vulnerable countries caught in the backlash of volatile capital flows. In fact, their response, by and large, has been to seek stability through more integration, not less.

The changes are perhaps most striking in Latin America, where the crisis hit earlier. Those countries, like most developing (and many industrialized) countries, have long felt that national ownership of banks (and other financial institutions as well) is a key element of economic autonomy and national sovereignty. To take just one example, Mexican demands to maintain Mexican ownership of Mexican banks was a large stumbling block in the NAFTA negotiations. It was compromised only with great difficulty.

Today, in contrast, Mexico welcomes foreign participation in capitalizing its banking system, to the point of accepting substantial foreign control and ownership of all but the very largest. In Argentina, only one private bank of any size remains locally controlled. Several Korean banks are in the process of passing to foreign control or ownership. While less advanced, similar pressures are apparent in Thailand and elsewhere.

The rationale is clear. It is, in fact, the rationale driving much of the merger and acquisitions activity among financial institutions in the industrialized world.

Size and diversification (including geographic diversification) offers stability. The risks to small financial institutions in economically small countries, sailing in a turbulent sea of global finance, are reduced if not eliminated by becoming part of a large international organization. The apparent sacrifice of national sovereignty seems a reasonable price to pay for efficiency and stability. Indeed, in the wake of crises, the policy autonomy perceived in local ownership may be more illusory than real.

There are parallel trends in the non-financial world. In the short run, even strong international companies operating in emerging economies, have been hurt by the economic turbulence. However, their basic viability has not been impaired. Quite to the contrary, profitable companies with large financial resources can see new opportunities in the turbulence. They want to strengthen their market position in the emerging world. Consequently, the process of direct investment, in contrast to portfolio investment, has been well maintained.

Although the numbers are much smaller, the converse is also true. Large well managed companies in the developing world want to reach outside their national boundaries to diversify their production and sales.

These changes in turn add to the pressures to internationalize stock markets, to conform accounting standards, and to coordinate financial regulation. Progress in those areas won’t be instantaneous—it involves too many complications and vested interests for that. But what seemed impossible or impractical a few years ago now seems almost inevitable over time.

The most striking reflection of globalism lies in another area. It is an area that, I believe, goes to the heart of the matter—even though it runs against the grain of much economic theorizing.

I refer to the new interest—and it is essentially new—of many small countries in finding stronger devices to fix firmly the price of their currencies. The clear object is to end the threat of currency crises and volatility. A few countries—Argentina, Hong Kong, Estonia—have for several years adopted the rather arcane and almost forgotten device of a currency board to assure that result. In principle, they have attached their national currency to the dollar by backing it fully—one for one—with dollar reserves.

Other countries are debating whether some of variant of that approach is suitable for their particular circumstances. More striking still is the active discussion, official and unofficial, in some countries of the desirability of abolishing their local currencies entirely—in the jargon, dollarizing (or perhaps “Euroizing”) their economies.

Consider all these trends—in finance, in industry, in monetary affairs—together. What we see is emerging countries wishing to participate fully in the world economy. Under the pressure of crises, they have been willing to sacrifice previously strongly held views about economic sovereignty and policy autonomy. They do not do so lightly. They do so because they perceive the balance of economic advantage is on the side of integration, not on the side of isolation. And technology makes it increasingly difficult to compromise the issue.

My belief is that that is a correct judgment. The irreversible technological forces driving globalization do not leave a lot of room for currency or banking autonomy.

We have reached the point where globalization breeds more globalization.

Of course, that view can be questioned. But I find it both surprising and encouraging that so few countries, and so few influential voices in the developing world, seek to reverse the integration process, or even to slow it down. Mr. Mahathir in Malaysia is the principal exception, and Malaysia has adopted a rather comprehensive set of exchange and capital controls. Arguably, he had early success in blunting the worst of the Asian crisis. But even then, the tendency seems to be to ease the controls as the worst of the financial turbulence has receded. Other countries that have been forced into relative isolation by their own actions or by international political pressures—Cuba, Iraq, Iran, North Korea. They quite obviously provide no example of economic dynamism.

Paradoxically, an important threat to a satisfactory outcome of the globalization process for the developing world lies right here in the United States, in Europe, and in Japan. We, individually and collectively, provide the economic framework to which other most adapt.

Some of the implications are obvious. If Japan and Europe cannot restore growth and dynamism to their economies, or if the American economy should stumble badly, the prospects for growth in the developed world will surely dim.

Consider, too, the fact that an open American economy, freely accepting imports from all over, has been and will remain a mainstay of the entire world economy. Backtracking in any significant way from that commitment would be both a powerful symbol and a practical demonstration of retreat from the policies we preach to the rest of the world.

A more difficult and a more insidious risk lies in the currency area. The major economic centers have failed for a long time to come to a practical understanding of the importance of achieving some degree of stabilization among their own currencies. One precondition has been achieved—virtual price stability. But the exchange rates have fluctuated violently.

My proposition is a simple one. The effort of emerging nations to maintain stability in their own currencies and finances is enormously complicated by that volatility of the major currencies. To the degree the trading patterns of small open economies are broadly diversified among the United States, Europe and Japan—which is particularly the case with the Asian countries—there isn’t any satisfactory technical solution. For instance, the radical changes in competitive positions inherent in shifts of 50 percent or more in the Yen/dollar rate over the space of a year or two—and that has been the pattern in the 1990’s—inevitably will be reflected in distortions in competitive positions. Inefficiency and uncertainty is the result.

We are a long ways from reaching any intellectual consensus on that point—much less deciding upon practical ways of dealing with the problem. I will refrain from pressing my own ideas in that area upon you this evening.

But I do want to insist upon the broader point. The crises—the repeated and highly contagious crises—that we have been experiencing in the monetary and financial world both reflect and force the pace of globalization.

The response has been more integration, not less. But it would be a mistake to think the outlook is secure.

Will the emerging countries, say five years from now, be back on a secure growth path, with per capita incomes again rising strongly?

Will they achieve reasonable financial stability with diversified international banks and financial institutions providing both competitive strength and efficiency?

Will the core countries—the United States, Europe, and Japan—get back on a more balanced growth pattern, and manage greater currency stability among themselves?

If so, then globalism will be an economic and political success as well as a technological imperative.

We can be optimistic—we should be optimistic—about the economic potential for the new millennium, the potential for lifting literally billions of people out of poverty, enabling them to reach their human potential.

But we need to realize, too, that reaching that potential will require more than new technology. It will require understanding and strong leadership.

We typically identify that leadership in political terms—with the United States and its President, with Prime Ministers in Europe, with particular men and women in the developing world that realize the potential of democratic capitalism and full participation in the international economy. But the understanding and leadership will need to go deeper than that.

That is an important reason I have felt privileged to participate in a small way this year in this great educational venture at the Stern School. With students from varied backgrounds and from so many places, the school is a reflection of the combination of diversity and globalism that we must seek. It can be—it is—one of the building blocks for making globalism work in the common interest.