Kemal Dervis to the Society for International Development

03 Jan 2009

Edited Transcript of Remarks Delivered by Kemal Derviş on the occasion of the Annual Gala Dinner, Society for International Development – DC Chapter

Washington DC - First of all, thank you, thank you all for being here and thanks to the Society for International Development for organizing this evening.  It is really a great honor, a great, wonderful event for me, and I hope for all of us at a time when we do face great big challenges.  We are at a particular moment in history, but there is also great promise.  
    
When Reza [Reza Moghadam] talked about the crisis in Turkey, there is one thing that I think I would like to underline because it is relevant to all of us in the world now-- in the United States, in Europe, in Japan, and the developing world--and that is that crises very often also represent opportunities.  I could never have gotten some of the reforms that Reza mentioned in Turkey agreed and implemented had it not been for a crisis.  The crisis provided an atmosphere, a political context that made the reforms possible.  In that sense, I do believe that while the current financial crisis the world is facing now is very tough and is now becoming an economic crisis, a jobs crisis, and is spreading across the world, I think it also makes us focus on some very important things that I will try to touch on this evening: that perhaps this crisis will create a political energy worldwide to move forward in a very forceful way.
    
Very often when I chat with friends and we discuss reforms at the country level, whether it is development, whether it is multinational organizations, when we face obstacles — bureaucratic obstacles, political obstacles — we very often come to the conclusion that without some real challenge that only a crisis can bring, you will not be able to overcome these obstacles.  I wish that in human affairs we did not need that.  I wish we could move forward without crisis and without special challenges. But when you look at history we recognize that often these types of crises are the only way to really move forward.  So, in that sense, I do not want to be pessimistic, I believe the crisis we are facing now will give us that energy, and yet at the same time I want to say that we are indeed facing a very, very huge challenge for the world economy,  particularly for development.  
    
But before we turn to that, let me just thank Reza and Francis Fukuyama for their remarks.  They are both important people in my life, both very good friends.  I must say Francis's book, his famous book, The End of History, had a deep influence on me.  I think he was very right in the main messages, and I do want to remind you that Francis Fukuyama did predict the collapse of the Soviet Empire and Communism in an article that appeared before the fall of the Berlin Wall; his book was published later.  I want to stress that, as we can also see from his later writings, The End of History, was about the end of a huge historical struggle, an ideological struggle between the Soviet system and liberal democracy.  It was won by liberal democracy, and it is in that sense that I always understood that message and I think that message remains valid.  It is not the “end of history” in the sense that there will be no further ideological debates or national competitions — history will continue, obviously.  But in that sense, the early 1990s were truly the end of history.  In the ‘50s, ‘60s, or even ‘70s, we lived with this ideological struggle, more so in Europe and the rest of the world than in the US, and that struggle was really the driving force of history during that period.  In the '90s that ended.  And what happened is of course the US emerged very strong.  Not only  militarily really, but ideologically in terms of the fact that liberal democracy and the market economy worked much better than the centralized Soviet system.
    
Then, in the '90s there was this great opportunity to build a new, much more unified world around these basic ideas, where the old division between the Soviet empire and the West was no longer a constant obstacle to building a world where multilateralism, the rule of law and respect for human rights would prevail.  Unfortunately, not by design but I think more by neglect, it did not happen.  There was this great opportunity in the '90s to rebuild the global governance institutions, to reform the UN Security Council, the United Nations, and the Bretton Woods Institutions.  I think what happened instead is that there was complacency :  the Berlin Wall had collapsed; apparently the world had been unified;, the market economy had taken over globally. What many of us around the world — also very much in the United States — neglected was that this integrated new world, the integrated market economy, did need governance and did need management; that while markets are wonderful and they are the best allocation mechanisms the humanity has ever invented, and there is really nothing that can replace the creativity of markets, nonetheless, markets have to be embedded  in a politically acceptable system with regulation, governance, redistribution, in a way that includes the more vulnerable and the poorest. Karl Polanyi had tried to convince us of that long time ago.

As markets have become truly global — as demonstrated in this financial and economic crisis — the mechanisms of regulation, redistribution and governance that have evolved in the nation state over the last two centuries really have to be also constructively built at the much more global and international level.  That does not, of course, mean a global government, do not worry.  But we are so interdependent that we need a system of cooperation, a system of regulation that is much more structured, much stronger than what we have today.  Perhaps this crisis we are living through will allow us to build this.  The G20 meeting convened by President Bush in Washington on 15 November could end up having been the somewhat unplanned beginning of that — but only the beginning.  At that meeting only intentions were stated, so in a sense nothing really happened, and it could not because the preparation period was so short.  But, nonetheless,  for the first time you had China, India, Brazil, Mexico, Turkey was there too, around the table with the leaders of the G7 looking at what needs to be done, looking ahead.  I really do hope that this will be a very important step in the kind of world we need to build for the 21st Century.

Addressing global problems with global solutions
I want to talk a little bit about contagion.  We have seen contagion in many forms, but one form that I experienced — not in the sense of being hurt by it, but in terms of the effort that was put together — was contagion in the area of health.  Two and a half years ago, avian influenza was a huge contagion.  Indeed, there were predictions that it would create a massive epidemic worldwide, and that perhaps hundreds of millions of people might die if the virus mutated.  
    
A truly multilateral effort was put in place.  The US played a very important role putting that in place, but it was truly in cooperation with other countries, in East Asia in particular, and with the United Nations under the leadership of the World Health Organization.  There was strong input also by UNDP, since UNDP, as you know, manages the Resident Coordinator system  (the country operations of the United Nations), in cooperation with the World Bank.  A huge effort was organized to detect cases, cull the birds, compensate those who lost their livelihoods because of having to kill the birds, setting up an early warning system, a compensatory redistributive mechanism, a governance structure, and an international exchange of information of news.  While I do not want to cry victory too fast because the virus is still there, it was amazingly successful.  The illness was isolated, peasants were compensated, and we were able to contain this, despite the tremendous danger of contagion.  If the contagion became too large, scientists tell us that it could have most likely mutated in some form — we do not know how virulent it would have been — but it would have mutated to become a human problem, too.  Perhaps we now vaguely only remember that, but two years ago it was considered a huge danger for the human community.  
    
I am giving this example because in this case we were able to mobilize citizens' support.  Somehow the idea of the virus creating contagions is very concrete and very scary.  But when you look at what happened on the economic side over the last year, the financial contagion, it is quite clear that a financial virus that started on Wall Street really infected the whole world and has now created a huge economic crisis.  We are so interdependent in our world today — whether it is avian flu or financial derivatives — the speed of contagion is tremendous, and the need for common action, for acting together, is huge.  
    
I do believe that when you look at the world, when you look at the world economy and we look at development, this recognition of interdependence is one of the fundamental aspects of our work.  It certainly in my life has increasingly become my passion, to work and to convince people that the human community truly is extremely interdependent, and that we must absolutely find ways to cooperate, and to manage together.  And when we do that, we can do very well, and when we don’t, the costs are extremely high.
    
It’s not easy because citizens live in nation states.  Nation states still have their legitimacy of course; thankfully, citizens elect their governments, their parliaments in many countries, following that famous adage “all politics is local.”  And yet, many of our problems are so global.  I mentioned health, I mentioned the financial crisis, and now a huge global problem is of course climate change and the whole global warming issue.  Again, we do not have time to go into details, but there are lots of uncertainties, and sometimes the arguments become extreme, but I do believe there are huge problems related to climate.  We have increasingly become aware of them.  When we drive our cars home today from this meeting, the emissions from those cars will affect the whole world.  It does not just affect Washington, DC or the United States, and what people do in Moscow and Tokyo is the same story.  So how to deal with policy in this extremely interconnected world is I think one of the great challenges we face, and of course, we are facing it right now with this financial crisis.

One last word on the financial crisis.  It is no longer just finance.  We now have an economic crisis, a jobs crisis, we have a collapse in private demand across the world, and as people lose income and jobs, that has another feedback mechanism onto the financial sector.  It is no longer just toxic products, and sub-prime mortgages sliced and repackaged that created the problem. It is the fact that firms, enterprises, consumers and households are having credit-worthiness problems.  We are entering now the next phase: the crisis that started in the financial sector, affected the real sector, now the real sector is feeding back onto the financial sector, and things are getting very, very serious.  And here too the response obviously will have to be fiscal; I think many of us who took Economics 101 in various schools around the world are rediscovering basic Keynesian economics.  We are at the point when public expenditure will have to compensate temporarily, at least, for the collapse of private expenditure.  And yet how this will be done, which country will do how much, has to vary according to individual country circumstances, according to debt situation and current account deficits — not everybody can do the same.  Germany has much more of what we would call "fiscal space" than let us say the United Kingdom has at this point, or Italy.  The US is an interesting case because the probable increase in debt in the US is huge, but because the dollar is such a key reserve asset, the US can probably do a lot more than many other countries.  

But here too, the big danger is that the countries will not coordinate sufficiently.  Germany will say, "Well, let the US do all this and their debt will increase, and we will export to them, and we will not lose much.  That will keep our ammunition dry." If everybody does that we will all sink together.  So there is a need to orchestrate the worldwide fiscal expansion to fight this crisis.  And, of course, it has to include the emerging markets, but the emerging markets are in many ways developing countries, much weaker than the rich countries; many of them do not have the power to inject liquidity into the system that is equal to what Europe and the US can do.  So helping them cope with all this is going to be the very important part of the overall response.  

And here, my friend Reza is at the center of the action; it has to be clearly through the IMF.  One year ago people were saying, "We do not need it anymore."  In fact, staff were retiring at the IMF.  And yet today we absolutely need the IMF to help harmonize the fiscal and monetary response.  But for it to be acceptable, legitimate reforms of governance, i.e., the place of the developing countries at the Board, the rebalancing of quotas and votes, etc. are absolutely essential because we cannot have international organizations that fulfill this extremely important policy coordinating role if the governance of these institutions does not reflect the realities of the 21st Century, the weight of developing countries, the new populations, their economic importance, their importance in terms of trade, investment and so on.  

So, managing all this interdependence, and letting the international and the financial institutions play this role — the IMF in financial cases and in other cases, the United Nations, or the World Health Organization, or the International Labour Organization — is, in my view, absolutely critical for development.

The impact of the financial and economic crisis on the poorest countries
In the context of this whole international effort that we have to undertake, clearly we must not forget the least developed countries: the poorest countries in Africa and parts of Latin America, Central America, and parts of Asia, still.  They are hit by this crisis at the time when they were just beginning to benefit from globalization, when their exports were increasing, when they were attracting foreign investment, when commodity prices had been rising — perhaps a little too much, but, some rise is very welcome.  Africa was growing at six percent for the first time in decades, and now this crisis is hitting them with full force.  
    
The decline in world trade, exports and foreign investment are affecting the least developed countries.  Clearly, if we want to have a global world that grows together, that has confidence, if we want to deal with the security problems, the failing states problems, we cannot forget these countries.  We cannot let this crisis now destroy their growth prospect, their development prospects.  In that sense, I think in the US particularly, in Europe also of course, there is a huge need now to join forces to maintain official development assistance levels to these countries.  Not that official aid can solve all problems, but it is a very important ingredient, particularly for the poorest countries.  Letting this crisis crowd out this basic assistance by the public sector, but also by the private sector which has been doing a lot, all that is in danger now.  So while we deal with the crisis in the US, Europe, and Japan, in Turkey, and China, Mexico, and Brazil, you cannot forget the Nigers, Malawis, Bangladeshes, or the Hondurases who have been hit by this, and who absolutely still need that official assistance.

That is where we stand today. And that is going to require a huge amount of energy, I think, from all of us in this room.  The purpose of it, to make sure the resources are there, the attention is there, that we stress the fact that failing here would be a big ethical failure, but also a big political failure, and would definitely create security problems.  

I am very optimistic that the new Administration in the US is focused on it.  I must say President Bush also has played a leadership role on some of these issues, particularly focused on Africa, and greatly increased the US assistance effort, but much more needs to be done.  The amount of relative resources that the US sets aside for assistance are quite small, but I do hope that this refocusing of attention, also in increased resources and manpower and womanpower that is promised for the State Department, and in diplomacy, take place — it is I think extremely important and timely.

Personal reflections on 35 years in development
Ending my remarks let me emphasize a few points in terms of my own work, my life in development that now covers more than 35 years.  

When the then Turkish Prime Minister called me and asked me to come home to try to help with the crisis, I of course called quite a few of my friends around the world, particularly those in Washington, for advice.  Because I had been a university professor in Turkey, at Princeton, and then a worldwide practitioner for more than twenty years, but I had never actually been in office - and there is  a difference between being at the university, or being an advisor at the World Bank!- and actually being the decision maker !  So that was pretty scary, and so I called many friends.  The one who gave me the best advice was the Governor of the Central Bank of Mexico, my dear friend, Guillermo Ortiz, who had also been Finance Minister during the Tequila crisis in Mexico in 1994.  He said, "Kemal, you are going to be terribly busyjust reading files, absorbing data and so on, particularly since you have been out of Turkey quite a while, but if you do not spend half of your time trying to explain what you are doing, and why you are doing it, you are going to fail.  Protect that time that you spend with civil society, with entrepreneurs, the private sector, with the unions, on TV, with journalists.  It is crucial, it’s not a luxury, it’s essential because if you do not get that support from civil society, you will not make it."  And that really was the best advice I got, from Guillermo.  And as I said, the second day I arrived I asked the unions to host me.  The TV programme was directly televised across the country where we debated issues for one and a half hours.  I did not realize it at the time, but it was so important in maintaining social peace in Turkey, because we went through this extremely difficult austerity programme involving cuts in real wages, very tough tax reforms without a general strike — no major unrest .  I think if I had not engaged the unions in this debate it would not have worked.  So I really do owe a lot to Guillermo for giving me this very good advice.

The second point I’d like to make has to do with expert opinion:  don’t overemphasize it or overrate it!  When long-term capital management collapsed in 1998, I do not know if you remember that there were, in fact, two Nobel Prize winning mathematicians who were actually the minds behind this hedge fund.  This single hedge fund almost brought down the world financial system at the time; it had to be bailed out.  It was an early warning that I wish we had taken more seriously.  Of course expert opinion is very important; you cannot hire a fisherman to fly an airplane or something like that.  But I think that when you look particularly at economic and social affairs, when you look at the experience you have had, particularly with this crisis now, nothing can replace common sense, and debate among citizens with civil society, questioning the experts, and a common sense approach.  

I am amazed when you read about what has happened in the financial sector worldwide, particularly in the US, you do not have to be a financial expert to see this is crazy.  Crazy leverage ratios, people buying subprime mortgages and transforming a subprime asset into a triple “A” asset, and then rating agencies that are paid by the people who are being rated.  It does not take rocket science to figure out that something was really wrong with all of this.  But in a sense we left it to the experts.  It should not be so — that is one of the great things about democracy.  Democracy is about not leaving things just to the experts.  Of course, you value them, you want them; I’m the last person to be anti- expert, or anti- intellectual.  But citizens have to engage, have to participate, civil society has to be there, and when that happens, you get better solutions.  

And so groups like the Society for International Development can help us all, encourage us all to engage, and not to take any answers for granted.  You really have to ask the tough questions, even to the experts.  I think that is extremely important.  

My wife Cathy, around 1999 after the repeal of the Glass-Steagall Act— she’s an expert in East Asian studies and languages, but not a finance expert — she asked me "Isn't it dangerous to let investment banks and commercial banks merge?  My deposits will be used for all kinds of investment banking activities?"  And I said, "No, no.  Europe has been doing it for a while, and so don’t worry too much about this"  It was her natural, common sense reaction that maybe it is not such a great idea to have this kind of merging of the financial activities, and she obviously had a point, but I think we really let the financial sector get away with murder on the basis that they know better, that they are the experts, whereas I think just common sense citizen engagement could have helped a lot to prevent these problems.  

Looking ahead: re-balancing economic systems
The third point I want to make tonight and leave you with is what will this all mean for the longer term?  

I think there probably is a need to re-balance  the way we organize our societies.  There must be a better equilibrium between efficiency and maximum profit considerations on the one hand and  robustness and human security on the other— the latter is, of course, a concept that we at UNDP really promoted and love.  Efficiencies are critically important, and societies that are not efficient, that do not “push the envelope”, in the long run will not be robust.  We saw huge inefficiencies with the collapse of centralized communist style economies, but they did have job security, people did have jobs.  On the other hand, if you go all the way in every minute of your life trying to be efficient, trying to maximize profit, we may be creating by that source of vulnerability, and lack of robustness that can lead to major accidents.  

My son is an aeronautical engineer by training, also from Princeton, although now he is a lawyer.  And he said, "Look we do not build airplanes so that they are maximally efficient.  They have to withstand unlikely events.  And so we build them to be robust, to withstand crisis, and to be secure.”  And I think that when we organize the economic system, the banking system, the economic mechanisms, we have to think much more about that dimension, not giving up on efficiency, but rebalancing it, finding some kind of optimal balance between efficiency and  this constant seeking of profit, and the security and robustness that we need in human affairs because when unlikely, big catastrophic events happen, the cost is huge.  And again, I do not want to go into climate change discussions, tonight we do not have the time but climate change is another example of that.  We do not know for sure how big  the risks are.  Science tells us they exist, it is very hard to evaluate how quickly they will be there, but given what is happening human society has to insure itself on the climate side.  And we may have to pay a price for it, we may have to give up some immediate income for it, and divert some resources to that.  But we have to act because the risks are there, and we cannot just consider that catastrophic events will never happen.  

The role of multilateralism in development: UNDP’s work in developing countries
Finally, coming back to interdependence, I want to say a few words about UNDP because all these ways of promoting interdependence internationally need networks, and UNDP is, I think, more than anything else an extremely useful network .  At UNDP we do not have hundreds, or tens of billions of dollars to work with. The IMF had a new short-term lending facility, $100 billion; sometimes I look at it, and think, oh, that sounds good, I wish the UN got something like that!  I am sure many of you wish that too!  But the networking capacity of UNDP really is tremendous, and of the United Nations in general, but since I am responsible primarily for UNDP I can focus on UNDP. The fact that we are active in 160 countries, 134 developing countries — and UNDP does not just work with staff, it uses local partners: NGOs, international NGOs, local NGOs, academics — multiplies the effort.  The fact that we are trying to link the fundamental values of the United Nations Charter to development work, to capacity development work; the fact that UNDP always tries to build the capacity of countries rather than do it ourselves.  All of these things I think are extremely useful in the challenges we face in this decade and in this country.  People are brought together; civil society is brought together; foreign donors and NGOs from abroad.  One thing I have always admired, how many of our practitioners, how many of our resident coordinators — not all, but many — is that they manage to work with the government and yet they remain close to the opposition.  They are not captured by governments—  they are, of course, hosted by governments— but it is so important to bring in the whole opposition to debate, to bring in the civil society, and not to be official in a sense, but very close to civil society.  

So, all of these things are extremely valuable. Many of you know UNDP, of course, many of you work with UNDP, and many of you are doing exactly the same thing: You are networking, you are leveraging your knowledge, your experience, and you are all open to debate and new ideas.  And it is out of these ideas that I think the best solutions come.  What is appropriate in one country may not necessarily be appropriate in another.  And the way the UN works, this interdependent work, the kind of pulling together, I think does make it an indispensable part of the instruments that we need to interface with the challenges of the coming years.  

I do greatly look forward, not just myself personally, but all my colleagues working in the United Nations system and at UNDP, we greatly look forward to a very strong partnership with the United States, with the government, of course, but with all parts of American society.  I have seen in my life in many ways, whether it is in Turkey, or in the UN, or the World Bank, and I think Hillary Clinton said it, not exactly these words, but when she accepted her new position as Secretary of State, she said something that is very true.  She said, "America must work with the world, and the world must work with America."  The US has tremendous power, still despite all the problems, tremendous wealth, tremendous know-how, tremendous ideals that are always admired outside the United States.  And now I think there is a moment when the US can engage with the world in a way it unfortunately did not quite do after the fall of the Berlin Wall.  Because there was too much complacency, it was too easy at that time, there was no competition.  The Cold War had been won, the economy was doing great, so there was understandable complacency; now we are in a much more difficult position.  But at the same time there is a tremendous opportunity to engage, a tremendous opportunity to fix what needs to be fixed, to do it jointly; not in a way that one country dictates it to another, but in a way that the most powerful country, the country with greatest resources leads the way in building an interdependent world that can use the technology we have, the resources that we have, to truly make poverty history, and to truly bring peace and friendship to all people around the world.  And I know that is what the Society for International Development stands for, and that is why I am so happy to be here tonight.  

Thank you very much.
        
(ENDS)