The Surest Path Back to Prosperity
‘If you seek economic growth, social justice and human dignity, the free-market system is the way to go.’
As we have seen in recent months, financial turmoil anywhere in the world affects economies everywhere in the world. And so this weekend I’m going to host a Summit on Financial Markets and the World Economy with leaders from developed and developing nations that account for nearly 90% of the world economy.
The leaders attending this weekend’s meeting agree on a clear purpose — to address the current crisis, and to lay the foundation for reforms that will help prevent a similar crisis in the future.
This crisis did not develop overnight, and it’s not going to be solved overnight. There’s going to be difficult days ahead. But the actions taken by the U.S. and other nations are having an impact. Credit markets are beginning to thaw. Businesses are gaining access to essential short-term financing. A measure of stability is returning to financial systems.
In addition to addressing the current crisis, we will also need to make broader reforms to strengthen the global economy over the long term. For example, nations must make their financial markets more transparent and properly regulated. The rules governing market manipulation and fraud must ensure that investors are properly protected.
The IMF and World Bank should consider extending greater voting power to dynamic developing nations, especially as they increase their contributions to these institutions. They should also be made more transparent, accountable and effective. The IMF should agree to work more closely with member countries to ensure that their exchange-rate policies are market-oriented and fair. And the World Bank should ensure its development programs reflect the priorities of the people they are designed to serve — and focus on measurable results.
All these steps require decisive actions from governments around the world. But we must recognize that government intervention is not a cure-all. For example, some blame the crisis on insufficient regulation of the American mortgage market. But many European countries had much more extensive regulations, and still experienced problems almost identical to our own.
History has shown that the greater threat to economic prosperity is not too little government involvement in the market, it is too much government involvement in the market. We saw this in the case of Fannie Mae and Freddie Mac.
Because these firms were chartered by the U.S. Congress, many believed they were backed by the full faith and credit of the U. S. government. Investors put huge amounts of money into Fannie and Freddie, which they used to build up irresponsibly large portfolios of mortgage-backed securities. When the housing market declined, these securities, of course, plummeted in value. It took a taxpayer-funded rescue to keep Fannie and Freddie from collapsing in a way that would have devastated the global financial system. There is a clear lesson: Our aim should not be more government — it should be smarter government.
All this leads to the most important principle that should guide our work: While reforms in the financial sector are essential, the long-term solution to today’s problems is sustained economic growth. And the surest path to that growth is free markets and free people.
In the wake of the financial crisis, voices from the left and right equate the free-enterprise system with greed and exploitation and failure. It’s true this crisis included failures — by lenders and borrowers and financial firms, and by governments and independent regulators. But the crisis was not a failure of the free-market system. And the answer is not to try to reinvent that system. It is to fix the problems, make reforms, and move forward with the free-market principles that have delivered prosperity and hope to people all across the globe.
Capitalism is not perfect. But it is by far the most efficient and just way of structuring an economy. Capitalism offers people the freedom to choose where they work and what they do, the opportunity to buy or sell products they want, and the dignity that comes with profiting from their talent and hard work. The free market provides the incentives to work, to innovate, to save, to invest wisely, and to create jobs for others. And as millions of people pursue these incentives together, whole societies benefit.
Free-market capitalism is what makes it possible for a husband and wife to start their own business, or a new immigrant to open a restaurant, or a single mom to go back to college and to build a better career. It is what allowed entrepreneurs in Silicon Valley to change the way the world sells products and searches for information. It’s what transformed America from a rugged frontier to a nation that gave the world the steamboat and the airplane, the computer and the CAT scan, the Internet and the iPod.
Free markets allowed Japan, an island with few natural resources, to recover from war and grow into the world’s second-largest economy. Free markets allowed South Korea to make itself into one of the most technologically advanced societies in the world. Free markets turned small areas like Singapore and Hong Kong and Taiwan into global economic players.
Nations that pursued other models have experienced devastating results. Soviet communism starved millions, bankrupted an empire, and collapsed as decisively as the Berlin Wall. Cuba, once known for its vast fields of cane, is now forced to ration sugar. While Iran sits atop giant oil reserves, its people cannot put enough gasoline in their cars.
The record is unmistakable: If you seek economic growth, social justice and human dignity, the free-market system is the way to go. It would be a terrible mistake to allow a few months of crisis to undermine 60 years of success.
Just as important as maintaining free markets within countries is maintaining the free movement of goods and services between countries. When nations open their markets to trade and investment, their businesses and farmers and workers find new buyers for their products. Consumers benefit from more choices and better prices. Entrepreneurs can get their ideas off the ground with funding from anywhere in the world. Thanks in large part to open markets, the volume of global trade today is nearly 30 times greater than it was six decades ago — and some of the most dramatic gains have come in the developing world.
I have seen the transformative power of trade up close. I’ve been to a Caterpillar factory in East Peoria, Illinois, where thousands of good-paying American jobs are supported by exports. I’ve walked the grounds of a trade fair in Ghana, where I met women who support their families by exporting handmade dresses and jewelry. I’ve spoken with a farmer in Guatemala who decided to grow high-value crops he could sell overseas — and helped create more than 1,000 jobs.
Keeping markets open to trade and investment is especially urgent during times of economic strain. Shortly after the stock market crash in 1929, Congress passed the Smoot-Hawley tariff — a protectionist measure designed to wall off America’s economy from global competition.
The result was not economic security. It was economic ruin. Leaders around the world must keep this example in mind and reject the temptation of protectionism.
There are clear-cut ways for nations to demonstrate the commitment to open markets. The U.S. Congress has an immediate opportunity by approving free-trade agreements with Colombia, Peru and South Korea. America and other wealthy nations must also ensure this crisis does not become an excuse to reverse our engagement with the developing world. Developing nations should continue policies that foster enterprise and investment. As well, all nations should pledge to conclude a framework this year that leads to a successful Doha agreement.
I know some may question whether America’s leadership in the global economy will continue. The world can be confident it will, because our markets are flexible and we can rebound from setbacks.
We saw that resilience in the 1980s, when Americans overcame gas lines, turned stagflation into strong economic growth, and won the Cold War. We saw that resilience after September 11, 2001, when our nation recovered from a brutal attack, revitalized our shaken economy, and rallied the forces of freedom in the great ideological struggle of the 21st century.
The world will see the resilience of America once again. We will work with our partners to correct the problems in the global financial system. We will rebuild our economic strength. And we will continue to lead the world toward prosperity and peace.
Mr. Bush is president of the United States. This op-ed is excerpted from a speech on Thursday in New York City hosted by the Manhattan Institute.