ABSTRACT
I am sometimes asked by friends about the difference between academic life and life as a public official. There are many. But two stand out. First, as an academic, the gravest sin one can commit is to sign one’s name to something one did not write. As a public official it is a mark o f effectiveness to do so as often as possible. Second as an academic, if a problem is too hard and does not admit o f a satisfactory solution, there is an obvious response: work on a different problem. I have been reminded o f this often in recent years as we grappled with financial crisis in a number o f what had been considered emerging markets with unrestrained futures. Anyone who doubts the social importance o f what, economists do should consider debates surrounding these crises. Hundreds of millions o f people who expected rapidly rising standards o f living have seen their living standards fall; hundreds and thousands if not millions o f children have been forced to drop out o f school and go to work; hundreds o f billions of dollars of apparent wealth has been lost; the stability of large nations as nations has been called into question; and the United States has made its largest nonmilitary foreign-policy related financial commitments since the Marshall Plan, Almost all o f the issues involved in understanding, preventing, mitigating these crises are the stuff of economic courses and research: fixed versus flexible exchange rates, moral hazard and multiple equilibria, speculation and liquidity, fiscal and monetary policies, regulation and competition. What economists think, say, and do has profound implications for the lives o f literally billions o f other fellow citizens. Whether it is discussing the role o f derivatives in signaling exchange-rate commitments with Chinese Premier Zhu Rongji, or discussing the an NBER working paper on inflation targeting with the Brazilian central bank governor Arminio Fraga, or discussing alternative approaches to bankruptcy law with Indonesia’s economic team, or optimal debt durations with the Mexican authorities, I am consistently struck by the impact o f the kind of research discussed at the ABA meetings. The future well-being o f the world’s people in larger part will depend on how the ongoing process o f global integration works out. This is a strong statement, but one that is supported by the global economy’s post-World War I
failure and its post-W orld War II success. Central to global integration is financial integration: the flow o f funds and o f capital across international borders. And as the events o f the late 1920s and early 1930s reminds us, central to global disintegration can be international financial breakdowns. I want to reflect on the issue o f global financial integration in the light o f the dramatic and largely unpredicted events o f recent years. It is perhaps a good time for reflection. There has been enough repair that priority can shift from immediate crisis management, but the crises are sufficiently recent that the sense o f urgency that they create to improve the system has not been lost. I shall address four issues: what it means to have an efficient financial system, highlighting the important fact that accident prevention is only one aspect o f how that system performs.
